The Emerging Reality of Oil Depletion

1. Where theory and practise meet The Emerging Reality of Oil Depletion

2. Who am I? Chris Skrebowski has spent half a working life working in the oil industry and the other half as an oil journalist. Free of corporate or political pressure he brings a healthy scepticism to the problem Why speak out?

3. An important disclaimer In this presentation the opinions expressed are entirely those of Chris Skrebowski in his capacity as an ODAC Trustee and as such do not necessarily reflect the view of the Energy Institute for whom he edits Petroleum Review

4. The practical realities of oil depletion -- aproduction and project based analysis • The world needs oil production flows • Peak oil is when flowscan’t meet the required demand • This will cause an ‘Economic Tsunami’ • There’s not much time to accommodate

5. As ‘Peak Oil’ approaches we can movefrom reserves based analysis to production and project based analysis • Reserves based analysis has served us all well but the reserves data is weak • New project flows can be monitored • Outright, visible, depletion can be listed • The demand that can be met established • The likely date of ‘Peak Oil’ determined

6. A simple observation ‘Global production falls when loss of output from countries in decline exceeds gains in output from those that are expanding.’

7. Psychology -- Nobody likes a party pooper • Cheap oil has given us the greatest economic party in history. Of course we don’t want it to end • ‘We see what we want to see and we hear what we want to hear’ (Nilsson 1971 LP ‘The point’) • That’s why it is hard to be objective about the evidence • Its also why we must be objective about the evidence • Hopefully you’ll ask lots of tough questions • If you can find fault – I’ll be delighted

8. What is at risk? History shows us that supply shortfalls lead to high oil prices and high oil prices lead to economic recessions • 80-95% of all transport is fuelled by oil products • All petrochemicals are produced from oil • 99% of all lubrication is done with oil products • 95% of all goods in the shops get there using oil • 99% of our food involves oil or gas for fertilisers, agrochemicals, tilling, cultivation and transport

9. Can oil demand be met until 2010? • Demand growth has been very strong • More of world population are consumers • Supply is tight and straining to keep up • There is virtually no spare capacity • New capacity takes a lot of time • The economists tell us there’s no problem

10. We ask to see the industry leaders to see if we can make it to 2010 • They look worried but tells us they have always made it before • And explain there are four key dials • Oil prices -- the most accurate dial • New oil supplies -- pretty accurate • New oil demand -- a bit unpredictable • Outright depletion -- pretty accurate

11. What does the pricing dial tell us? (In 2005 Dollars) • If prices are under $20 the world booms • A price jump to over $40 gave us the 1973/74 recession • A price jump to $80 gave us a 5-year recession 1980/85 • Prices over $100 will give recession • We’re now at around $50, and rising?

12. What does the new supply dial say? (In million barrels/day)

13. What does the new oil demand dial show?(In million barrels/day) • In 2003 oil demand grew by 1.8mn b/d (2.3%) • In 2004 oil demand grew by 2.8mn b/d (3.5%) • In 2005 3rd revision is 1.8mn b/d (2.2%) • Twenty year average is only 1.5-1.8mn b/d

14. What does the new oil demand dial show?(In million barrels/day) • Is Chinese and Indian growth a paradigm shift? • Have we forgotten compound interest? • 5% of the world population, the USA, uses 25% of the world’s oil production.

15. What does the depletion dial tell us? Three sorts of depletion: • Type 1 is ‘within field’ like different pumps in bar • Type 2 is ‘within country’ like different bars • Type 3 and most important is ‘between countries’ like different pubs, it is visible depletion • Total (1,2 &3) depletion around 5% or 4mn b/d/yr • Type 3 depletion is now 1.1mn b/d and rising

16. There is a fifth dial for global depletion • It’s very accurate on the oil we’ve used • We’ve used roughly half of what is proven • It’s like a speedometer generally accurate but the top speeds are problematic • Colin and Jean are the experts • I’m sticking with the others dials because my analysis is production based

17. Alaskan North Slope ProductionReserves grow -- Production falls

18. Let’s have a look at the UK North Sea(Production change in thousand b/d) • In 1999 it grew by 3.58% or 100 kb/d • But in 2000 it fell by 8.15% or -236 kb/d • And in 2001 it fell by 6.81% or -181 kb/d • But in 2002 it fell by just 0.52% or -13 kb/d • But in 2003 it fell by 8.85% or -218 kb/d • And in 2004 it was 10% down or -230 kb/d • Norway peaked in 2000, Denmark in 2005

19. Let’s have a look at the UK North Sea(All you need to know about depletion) • Go to http://og.dti.gov.uk • Click on ‘Information’ • Click on ‘List of fields’ • Click on ‘Production history’ • Then just click through the list of fields in the left hand column

20. North Sea production by field Forties monthly production to date

21. North Sea production by field Fulmar monthly production to date

22. North Sea production by field Piper monthly production to date

23. North Sea production by field Tern monthly production to date

24. 2004 was a key year for depletion • All spare capacity used (0.5-1.0mn b/d in Saudi?) • So now we have an accurate baseline • But also in 2004: • Refinery spare capacity nearly disappeared • Sulphur removal capacity did disappear • Chinese demand exploded • Tankers were costly and in short supply • But, skilled personnel is the biggest shortfall

25. Oil projects are slow and well publicised(Few if any surprises) • 2.5 years for an onshore rework (Saudi AFK) • 3-4 years for new onshore projects (Algeria) • 5-7 years for a major offshore field development • 8-9 years for Nigeria - Bonga, Agbami, Akpo • 5-6 years for a new refinery • Over 2 years for a new sulphur removal plant • The development die is largely cast to 2010 • That’s why the economists are misleading us

26. Type 3 depletion acts like new demand • Over 50 countries now depleting (18 large) • In 2003 some 28.8% of supply came from countries in outright depletion • Ten countries producing over 0.5mn b/d were in decline in 2003 • More large producers are set to decline

27. The top five decliners in 2003

28. About to go into decline(Increasing Type 3 losses) • Denmark producing 0.4mn b/d goes in 2005 • Malaysia producing 0.9mn b/d goes in 2005 • China producing 3.4mn b/d goes in 2005/06 • Mexico producing 3.8mn b/d goes in 2005/06 • Brunei producing 0.2mn b/d goes in 2006/07 • India producing 0.8mn b/d goes in 2006/07 • Collectively 9.5mn b/d or 12.3% of production

29. Oil companies will also peak • According to J S Herold’s recent analysis • Total’s production could peak in 2007 • In 2008 production from ExxonMobil, BP and Shell could reach a peak • In 2009 it could be Chevron’s turn • The companies have not commented • In 1Q 2005 their production declined by 3%

30. The Russian Enigma • Has policy changed? Has growth run out? • 50-95% of non-Opec growth in 2001-2004 • No growth at all in Russian production in 1Q2005

31. Some good news(production by end 2005) • Rapid production growth from • Kazakhstan (1.3mn b/d) and Azerbaijan (0.5) • Gulf of Mexico (1.7) and Brazil (2.1) • Sudan (0.4) and Equatorial Guinea (0.3) • From 5mn b/d in 2003 to over 8mn b/d in 2010

32. A simple observation ‘Global production falls when loss of output from countries in decline exceeds gains in output from those that are expanding.’

33. The oil depletion balance sheet at end 2004 • In decline 28%(2004) but 40% (by 2006/7) • In danger 12% (2004) but 10% (by 2006/7) • Russia 12% (2004) and 12% (by 2006/7) • Growing 48% (2004) and 38% (by 2006/7) • The scales are ‘balanced’ by 2006/7 • So does President Putin decide when decline starts? Or does Saudi geology?

34. The new Supply/Demand balances accounting for Type 3 depletion(In million b/d)

35. What economics really says • Economics requires that supply and demand always balance • Economists encourage us to believe that supply will expand to meet demand • If supply can’t expand we need high prices to ‘destroy demand’ • How high do prices need to go?

36. The CIBC answer • Assessed the likely supply shortfall and the oil price needed to reduce demand • 2006 1mn b/d and $61/barrel • 2007 2.8mn b/d and $70/barrel • 2008 4.8mn b/d and $80/barrel • 2009 6.7mn b/d and $90/barrel • 2010 8.9mn b/d and $101/barrel

37. The ODAC answer • The oil supply available would allow • 2005 demand growth of 1% but not 2% • 2006 demand growth of just over 2% • 2007 demand growth of just under 2% • 2008 demand growth of barely 1% • 2009 demand growth of just under 1% • 2010 No demand growth at all

38. Are there realistic substitutesfor the main oil products? • Petrochemicals – naphtha, some gas/LPG. (Few alternatives) • Aircraft fuel – jet kerosene, some Avgas. (No realistic alternatives) • Road vehicle fuels – Gasoline and Diesel dominant. (Alternatives - Large Investments/capital write-offs) • Ships and boats – marine diesel and fuel oil. (No realistic alternatives) • Lubricants and greases – (limited alternatives) • Power generation – (little oil now used) • Heating – (increasingly substituted by gas)

39. What’s the problem with alternatives? • Oil has the greatest energy density of any fuel known to man, apart from nuclear • This means all alternatives are inferior • You can cook sausages by collecting and burning straw but you may use more calories than you get by eating the sausages

40. What are the substitutes? • Alcohols - fuels and extenders (energy gain?) • Vegetable oils - diesel substitute/extender • Gas liquids - road fuels, feedstocks • Coal - heating, power generation Hydro, nuclear, wind, waves and biomass can all generate power. But at what cost? Little oil is now used for power generation. Can we make our economies all electric?

41. ‘Peak Oil’ in 2008? • Whatever approach we use the answer seems to be ‘Peak’ in 2008 • Before that, if all goes to plan, the world can, possibly, meet likely demand • After that it is hard to see how demand can be met without demand destruction • But, there are no guarantees

42. Delaying ‘Peak Oil’ • Economic slowdown/recession • Demand destruction via high prices • Systems overperforming • Peace in Iraq • Middle East opening to investment • But, accelerating projects produces cost inflation rather than more oil

43. Advancing ‘Peak Oil’ • Project slippage (happens regularly) • Increasing taxes/tighter terms (happening) • Accelerating decline (happening) • Upheaval in major producers (Iraq, Nigeria, Venezuela already happened) • Accelerating demand growth (China, India) • System breakdowns, wars and revolutions

44. What are my conclusions? • There are, at best, 31 months to Peak Oil • ‘Business as usual’ after 2008 is unlikely • High prices will continue • Restricted supply will continue • We are moving into a new world • It is a land without maps • We are all likely to be poorer

45. By 2010 Will this be the only practical use for SUVs or 4X4s?

46. Chris Skrebowski Editor, Petroleum Review cs@energyinst.org.uk + 44 (0)20 7467 7117 Contact: