Outlook on Crude Oil Depletion

Colin J. Campbell is respected as one of the world’s most knowledgeable experts on fossil fuels. After being awarded a Ph.D at Oxford in 1957, Dr Campbell joined the oil industry as an exploration geologist. His career took him to Borneo, Trinidad, Colombia, Australia, Papua New Guinea, the USA, Ecuador, United Kingdom, Ireland, and Norway. He is now an associate of PetroPlan, advising governments and industry. He has published extensively, and his recent articles have stimulated lively debate. His views are provocative yet carry the weight of a wide international experience.The following article is excerpted from a paper just recently revised. (02/18/02)

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C.J.Campbell

This paper is about Peak Oil. It truly is a turning point for Mankind, which will affect everyone, although some more than others. Those countries, which plan and prepare, will survive better than those that do not. It is a large and difficult subject, but the essentials are clear.

In summary, these are the main points that have to be grasped:

• Conventional oil – and that will be defined – provides most of the oil produced today, and is responsible for about 95% all oil that has been produced so far.
• It will continue to dominate supply for a long time to come. It is what matters most.
• Its discovery peaked in the 1960s. We now find one barrel for every four we consume.
• Middle East share of production is set to rise. The rest of the world peaked in 1997, and is therefore in terminal decline.
• Non-conventional oil delays peak only a few years, but will ameliorate the subsequent decline.
• Gas, which is less depleted than oil, will likely peak around 2020.
• Capacity limits were breached late in 2000, causing prices to soar leading to world recession.
• The recession may be permanent because any recovery would lead to new oil demand until the limits were again breached which would lead to new price shocks re-imposing recession in a vicious circle.
• World peak may prove to have been passed in 2000, if demand is curtailed by recession.
• Prices may remain weak in such circumstances but since demand is not infinitely elastic they must again rise from supply constraints when essential needs are affected

Peak oil is a turning point for Mankind. The economic prosperity of the 20th Century was driven by cheap, oil-based energy. Everyone had the equivalent of several unpaid and unfed slaves to do his work for him, but now these slaves are getting old and won’t work much longer. We have an urgent need to find how to live without them.

It is stressed that we are not facing a re-run of the Oil Shocks of the 1970s. They were like the tremors before an earthquake, although serious enough, tipping the World into recession. Now, we face the earthquake itself. This shock is very different. It is driven by resource constraints, not politics – although of course politics do enter into it. It is not a temporary interruption but the onset of a permanent new condition. The warning signals have been flying for a long time. They have been plain to see, but the world turned a blind eye, and failed to read the message.

Our lack of preparedness is itself amazing, given the importance of oil to our lives. The warnings were rejected and discredited as if they were words of soothsayers and prophets. But the warning was not prophecy – it simply recognised two undeniable facts:

Discovery reached a peak in the 1960s – despite all the technology we hear so much about, and a worldwide search for the best prospects. It should surprise no one that the corresponding peak of production is now upon us. This simple reasoning has, however, been rejected by flat-earth economists and others with a blind faith in technology and markets forces. Worse still, governments have listened to bad advice. There are many vested interests bent on confusion and denial.

It is worth briefly recalling what occurred in Europe in late 2000, as a foretaste of what happens when oil supply becomes short and expensive. The French fishermen blockaded the Channel Ports because their fuel costs had doubled, even though their fuel was already tax-free. The dispute spread rapidly to England and other countries. Schools were closed. Hospitals had red alerts because staff and patients could not reach them. Supermarkets started rationing bread. Trade and industry was seriously interrupted: the cost was huge. People lost confidence in their governments, whose popular support fell sharply. If an interruption in supply lasting only a few days could cause such havoc, it surely demonstrates how utterly dependent on oil we have become.

Depletion is an easy concept to grasp. Think of an Irish pub full of happy people. Think of their pleasure at the first sip from a full glass. Think of the frowns that begin to cross their faces when their glasses are half-empty. They know they have drunk more than is left. It is the turning point. Watch them savour the last drops. While they can order another round of drinks, they know in the back of their minds that eventually closing time will come when there are no more to be had. That is the meaning of depletion. We need to know how big each glass – or oilfield – is, and we need to think of closing time, and judge how many oilfields are left to find.

We are not about to run out of oil, but production is about to reach a peak, if it has not done so already. When peak comes depends on the issue of Rates:

• Discovery Rate – we now find one barrel of conventional oil for every four we consume
• Extraction Rate is controlled by the physics of the reservoir

Demand is driven by economic growth and price. Remember that price is not the same as cost. The cost of producing oil remains low, but its price has to reflect tax, scarcity and control of the main sources of supply.

Before measuring something, the first step is to decide what exactly to measure. It is a question every butcher asks. Does he weigh the meat or the bones as well? There are many different kinds of oil. Each has its own endowment in Nature, characteristics, costs, and rate of extraction that follows a general and inevitable zero-peak-zero profile. Each type contributes differently to peak. Some types rise to peak quickly, others slowly. We need to identify and measure each type carefully.

It is convenient to identify so-called Conventional Oil. It is the meat not the bones. It has contributed most oil to-date and will dominate all supply long into the future. We may concentrate on it, as it controls the date of peak. But there is no universal agreement on how to define it. Here, it is defined to exclude:

• Oil from coal and ìshale”
• Bitumen and Extra-Heavy Oil
• Heavy Oil
• Deepwater Oil
• Polar Oil

Natural Gas liquids from gasfields are also excluded because they belong to the gas domain. …

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Previous studies evaluated alternative scenarios of supply and demand, based on various assumptions of demand and oil price. Generally, they depicted a plateau of production, starting when Swing Share reached a critical threshold triggering an oil price shock, and ending when the Swing share reached 50% of world demand, which was held to be maximum Swing capacity. But as we approach closer to these critical times, we can see the unfolding picture with greater clarity.

It now appears that the world capacity limits were about breached at the end of 2000, and oil prices began to soar when it became clear that the historic trend of growth at about 2% could not be maintained. As in all previous cases, the high prices triggered economic recession, although there may have been other contributory factors. A highly inflated stockmarket, built on the cheap energy supply of the past and illusions of perpetual growth was evidently due for a radical readjustment. The demand for oil plummeted, falling 5% between 2000 and 2001 according to the Oil & Gas Journal, and prices accordingly crumbled.

OPEC found itself unable to react lest any action were perceived to be hostile to the United States in its conflict with Afghanistan, while the US grand fleet was anchored off the coast of Middle East. Iran and Iraq have been declared enemies by the US President, prompting fears that a new American invasion in the region may be contemplated. It would be a brave man to forecast the future in such circumstances, but the underlying resource constraints do give a basis for a new scenario. It assumes that if the world economy were to try to recover, the demand for oil would rise in parallel until it again hit the ceiling of falling capacity. High prices in a volatile market would follow, re-imposing recession. In these circumstances, it is reasonable to contemplate flat average demand and production until the Swing countries reach their assessed capacity limit of 24 Mb/d by 2010. Soaring prices and growing shortage will then initiate the long-term decline of oil production at the then depletion rate of about 2% a year. Although the model pictures a plateau of production to 2010, it is unlikely to be a very flat one, as great fluctuations in a highly volatile market may be anticipated. It seems therefore that we may look back and find that world peak was passed in 2000, six years before the midpoint of depletion.

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People once believed the earth was flat. Scientific observations to the contrary were treated as blasphemy. The same pressures manifest themselves to-day in a different guise. We might almost call some of them conspiracies of denial and obfuscation. The United States seeks to exaggerate the world’s oil endowment to reduce OPEC’s confidence. It pretends that it does not depend on Middle East oil. It puts out very flawed studies by the US Geological Survey and the Department of Energy. OPEC, for its part, exaggerates its resource base to inhibit non-OPEC investments and moves to energy savings or renewables. It fears losing its oil market on which it utterly depends, with its rapidly rising population. Companies conceal depletion because it sits badly on the investment community. …

Most companies have to sing to the stockmarket, but the Italian national company is less concerned by stockmarket imagery. Its Chairman was able to tell the truth when he reported “New reserves are failing to keep up with growing outputÖÖ My forecast is that between 2000 and 2005 the world will be reaching peak”. The French company, Total-Fina-Elf, has also published its view of a peak around 2010.

British Petroleum certainly wins the prize for the most oblique reference to depletion when it changes its logo to a sunflower and says that BP stands for Beyond Petroleum. But its executives sit on the board of Goldman Sachs, the bankers. They should accordingly know what BP actually thinks behind the lace curtains of corporate make-believe. What do the bankers say?

“The rig count over the last 12 years has reached bottom. This is not because of low oil price. The oil companies are not going to keep rigs employed to drill dry holes. They know it but are unable and willing to admit it. The great merger mania is nothing more than a scaling down of a dying industry in recognition that 90% of global conventional oil has already been found” (Goldman Sachs – August 1999)

Actions speak louder than words. The major companies and many others in the industry are merging and shedding staff. They are also buying their own stock. They conspicuously fail to invest in new refining capacity, which would surely be needed if production were set to rise as depicted. These are moves to downsize because there are no major investment opportunities left. Their past is worth more than their future – and they know it.

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Some general comments may be offered in conclusion, starting with a oil price

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