Friday, March 28, 2008

Colin Campbell and the Cracks of Doom

By Peter McKenzie-Brown
For many peak oil believers, this is the scariest chart you can imagine. The blue lines show historical oil discoveries. The gold lines project discoveries into the future. The line that looks like a rising serpent shows annual production up to about 2005. The chart was created by peak oil guru Colin Campbell in 2004 for a deliciously ironic article titled "The Heart of the Matter". The chart looks like a road map to the Cracks of Doom, and it has been quite influential.

In this column I have frequently provided arguments in favour of peak oil theory, and I am an unabashed admirer of Campbell and his work. However, I believe this chart, though directionally accurate, is simplistic and alarmist. It needs to be nuanced. We can do that in three ways.

• First, note that the blue lines essentially track the world’s new-field discoveries of light and medium oil. The chart suggests that these volumes are the world’s oil reserves. It doesn’t nearly reflect the reserves additions that come through infill drilling, enhanced oil recovery and other standard oilfield practices. By applying simple math to the chart (subtracting production from discoveries), you will come up with world oil reserves far short of the roughly 1.2 trillion barrels that the Energy Information Agency and other authorities have booked.

As they are developed, most discoveries prove to be much bigger than the estimates at time of discovery. This is partly because reserves are a function of economics. When you find a new field you calculate its reserves based on present conditions and price forecasts – say, in 1970, $2.50 per barrel into the foreseeable future. As prices rise relative to costs, you will get more oil out of that field – of that you can be sure.

The thinking by which M. King Hubbert forecast the year of peak oil production in the United States was incredibly successful. What is rarely discussed, though, is that Hubbert underestimated by about 50 per cent the amount of oil that would be available in the US after it reached the peak. To a large extent this was because new reserves became available through changing technologies and more favourable petroleum economics.

• Second, give heavy oil, bitumen and oil shale the credit they deserve. Because of the nature of the beast, these unconventional resources are not booked as reserves until they become economically and technically producible.

Alberta’s huge oil sands are a classic example. In 2005 America’s Energy Information Agency booked Canadian oil reserves as second in the world (after Saudi Arabia) because of the impact of higher prices and improved technologies on the oil sands. If that amount of oil – 174 billion barrels (174 gigabarrels) – were added to the gold-coloured reserves lines on Campbell’s chart, it would require a line that would tower over the rest of the chart by a factor of three. Campbell’s methodology does not account for this kind of event. And in all likelihood, much more of the oilsands will eventually be booked as reserves.

That point takes me to this chart (click to enlarge), which is also from Campbell’s article. The black wedge – characterized as “Heavy, etc.” in the legend – is his estimate of the contribution of heavy oil to the global energy liquids picture. Eyeballing suggests that he expected these unconventional resources to be about 4.5 million barrels per day by now, world-wide.

Heavy oil, synthetic oil and non-upgraded bitumen represent about two million barrels of production per day in Canada alone, and Venezuela and Mexico are also big producers. What’s more, Canada’s oil industry is working hard to develop export markets for heavy oil, because there is a great deal more production yet to develop. Indeed, Canadian producers are selling their heavy oil at a discount because they cannot get it to world markets.

According to one excellent and credible report, seven years from now Alberta alone will be producing about three million barrels per day of “Heavy, etc.” That estimate risks production for economic and environmental obstacles, so it is probably low.

• Third – and this is my main point – let’s acknowledge that the serpent-like production line in Campbell’s chart, while it is not a happy sign, is not the spectre of doom it appears. The world’s unconventional resources will greatly blunt the blow – relative to the steep declines described in Campbell’s chart, in any event.

One amazing feature of the oil sands is their incredible energy density. Imperial Oil’s Cold Lake bitumen plant, for example, is a tiny dot on the map of Alberta, yet it produces 6 per cent of Canada’s oil. The resource density of these unconventional resources is immense, and that density is what makes it such an important resource. The world is heading toward capital-intensive, technology-intensive, pollution-intensive and energy-intensive energy - bitumen from Cold Lake, for example.

The greater the capital intensity, though, the lower the geopolitical risk must be. Keep that in mind when you consider development prospects for Venezuela’s Orinoco heavy oil belt, which is so huge it rivals the resources of Canada. The geopolitical risks in that country are enormous, so the likelihood is small that new Venezuelan supplies will soon hit world markets.

Strongman Hugo Chavez is increasingly unpopular in his own country, however, and the economy is in disarray. Oil production is in decline even though the the country has the largest conventional reserves in this hemisphere. Given that situation, it is possible to imagine a post-Chavez Venezuela which will develop those resources and become a resurgent supplier to the world. If that happened, it would lead to another super spike in booked reserves.

I share the view that a global Hubbert’s peak is nigh. The world is facing serious energy supply problems, and they are related to peak oil. To too great a degree, however, the discussion has failed to recognize the immensity and importance of the world’s unconventional sources of oil. Those vital resources will radically change the shape of the chart as they are plotted into it.
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12 comments:

Anonymous said...

The first chart has future discoveries starting in 2001.

Doesn't seem so compelling when it's 7 years out of date.

Anonymous said...

What an odd article this is: It pretends not to know the difference between flow rates with reserves. Shame on you. The "arguments" you make here are as old as the hills.

Who gives a shit how much "unconventional" oil there is if it doesn't flow without immense energy inputs?

Peter McKenzie-Brown said...

Read Campbell's article. He is not talking about flow rates, but about reserves. The link is in the piece.

Anonymous said...

[quote]The thinking by which M. King Hubbert forecast the year of peak oil production in the United States was incredibly successful. What is rarely discussed, though, is that Hubbert underestimated by about 50 per cent the amount of oil that would be available in the US after it reached the peak. [/quote]

While I can't disagree with you pointing out Hubbert's error in estimating total reserves, I think you're overlooking a crucial element of peak oil theory when dealing stricty with reserves of unconventional oil.

Hubbert did correctly predict a peak, and subsequent decline of US production. US production has steadily declined since it's peak in 1970.

Production rate is the key here. It doesn't matter if Canada has 2 trillion barrels of tar sands, if they can't produce them at a rate sufficient to offset declines of conventional oil fields worldwide.

The highest estimates I've read for Canadian tar sand production is 3 million barrels per day. Venezuela is currently producing 2.4 Mbbl per day.

That's less than three percent of current world demand of 85 Mbbbl per day.

Campbell is making a valid point in his paper as well, in showing that real discoveries are lagging actual production on the order of 4:1. Clearly that is not sustainable indefintely.

I hope you are right and that these unconventional sources of oil can soften the decline in overall world production, much as the production from Alaska slowed the US overall decline.

But I have my doubts.

By the way, thanks for writing the article, I did enjoy reading it.

Anonymous said...

From Campbell's article:

"future production would be influenced not only by physical
supply as dictated by discovery rate and the immutable physics of the reservoir but also
by demand"

He clearly notes production limitations imposed by reservoir physics.

You also clump in bitumen when discussing crude oil, and Campbell shows no such incongruence, so a double penalty for you for thinking so and then accusing Campbell of not counting such foolery.

While Canada's tar sands have been politically reclassified as oil reserves, anyone with a brain knows they are not (and they've been known about for ages, so it's not as if a sudden discovery was made).

You are clearly a propagandist, so calling you out on just a couple of your more glaring misleading statements is a public service.

Anonymous said...

Could it be that you made an error in the article? You point to the chart about oil production, the base case scenario 2004 of Campbell, which shows production in Gigabarrels/year. Well, I wonder how you came to think he predicted 1 mb/d, which would be 0.365 gigabarrel/year. One gb/y equals 2.74 mb/d.
Checking that I get more like 1.7 gb/a or 4.65 mb/day for 2008.

Somebodys got precise numbers about his estimation, the definition (are tar sands included?) and the current production?

"Eyeballing suggests that he expected these unconventional resources to be about a million barrels per day by now, world-wide."

Peter McKenzie-Brown said...

I was wrong, and I thank you for pointing that out. I corrected the error.

Andre Angelantoni said...

I recommend that you read some of the articles listed at the Best of the Oil Drum Index before being so confident that unconventional oil will be able to make up for any significant amount of decline in conventional crude production.

The numbers aren't even close.

Also, have you read Hirsch's latest paper "Mitigation of maximum world oil production: Shortage scenarios" in the February issue of Energy Journal?

Unconventional oil is obtained through mining operations not pumping operations. It will never amount to more than a fraction of the oil currently produced and we may even be surprised to find its production decreases once we pass peak if the net energy profit remains as low as it is now (2-3x).

Peter McKenzie-Brown said...

Thanks for this comment. Actually, I have read (and written) quite a bit about the oil sands (and about peak oil) already, but I will also read Hirsch's paper.

You are wrong in a key areas. Some oil sands projects use mines; others use procedures like cyclic steam injection. Syncrude -- which I first visited in 1978, a month before it opened -- is an example of the former; Cold Lake, which I refer to in the article, is an example of the latter.

I appreciate your knowledgeable opinion, but I would be pleased if you would take my ideas on their own merit. I have actually written books about Canada's oil industry myself, and I worked in the industry for many years.

Your argument is along the following lines: "You're wrong; read some of the stuff I have read." With respect, I think arguments should be more solid than that.

Anonymous said...

Campbell does backdate additions to reserves to the original field discovery date. See ASP site here:

http://www.peakoil.net/uhdsg/weo2004/TheUppsalaCode.html

Anonymous said...

"As they are developed, most discoveries prove to be much bigger than the estimates at time of discovery. This is partly because reserves are a function of economics. When you find a new field you calculate its reserves based on present conditions and price forecasts – say, in 1970, $2.50 per barrel into the foreseeable future. As prices rise relative to costs, you will get more oil out of that field – of that you can be sure."

There are some things I wonder about. As the price of crude oil based in fiat currency rises, it is said that unconventional petroleum reserves become profitable. At what point, however, do they become unaffordable. Or do increasing numbers of consumers gradually get priced out of the energy market because, relative to their stagnant wages based on that same fiat currency, they simply cannot afford unconventional petroleum products, or any alternative fuels for that matter, regardless of how profitable they become. I think the end of high ERoEI crude oil will mark the end of the current growth-based economic paradigm. Once that fundamental change occurs, there may not be a need for developing unconventional reserves, at least not for use as relatively inexpensive (as in affordable to a middle class level consumer) transportation fuels.

Anonymous said...

Great Artile!! The first chart you show really sends the message home.

Here is a list of people who think we have a problem with production, all of these people think we will never get above 100 million barrels per day, most think we will never get above 90 millon barrels per day:

1)Jim Mulva (CEO Conoco Philips)
http://blog.foreignpolicy.com/node/7273

2)Christophe de Margerie (CEO Total)
http://www.davidstrahan.com/blog/?p=71

3)Jim Buckee (CEO Tailsman Energy)
http://www.energybulletin.net/39656.html

4)Faith Brohil (Chief Economists IEA)
http://energybulletin.net/31397.html and www.independent.co.uk/news/business/comment/outside-view-we-cant-cling-to-crude-we-should-leave-oil-before-it-leaves-us-790178.html?r=RSS http://www.davidstrahan.com/blog/?p=73

5)Salad Al-Huseni (Former Head of Production Saudi Aramco)
http://www.davidstrahan.com/blog/?p=68 Listen to audio
http://www.nytimes.com/2005/08/21/magazine/21OIL.html?pagewanted=8&_r=1&ei=5070&en=e21027acd19c1feb&ex=1145592000 Page 8

6)James R. Schlesinger (Former Head of CIA)
http://globalpublicmedia.com/transcripts/576 trascript U.S. senate committee

7)Franco Barnabe (CEO of ENi Italy)
http://www.greatchange.org/ov-korpela,US_and_world_depletion.html
http://sandersresearch.com/index.php?option=com_content&task=view&id=1324&Itemid=97

8)Mike Bowlin(Former CEO of ARCO)
http://www.energybulletin.net/37027.html
http://www.oregonpublichealth.org/Peak%20Oil%20-%20Oregon%20Public%20Health_Assoc.pdf

9)Helge Lund (CEO Statoil Norway)
http://www.dn.no/forsiden/energi/article933722.ece?WT.svl=article_title need to change to english

10)Shokri Ghanem (CEO Libyan NOC)
http://www.energycompass.com/om/review.asp?Year=2006 click on the presentation

11)Jeroen Van der Veer (CEO Shell Oil)
http://www.energybulletin.net/39582.html

12)John Hess (CEO Hess Energy)
http://www.pennenergy.com/display_article/320225/7/PRARC/none/GenIn/1/CERA:-Action-needed-to-avoid-oil-crisis,-Hess-chief-says

13)Rick Wagoner (CEO General Motors)
http://www.energybulletin.net/39096.html