Industrial civilization, as we know it, cannot exist without petroleum. We humans are facing an extinction level crisis. Any careful examination of the writings and papers of the world’s leading energy scientists will convince the reader of the validity of the fossil fuel energy crisis.
This problem is real and it is even worse that it appears. Matthew R. Simmons is one of the leading energy advisors to President George W. Bush and the United States Congress. The following is excerpted from a speech Simmons gave on May 23, 2002.
Matthew R. Simmons
… A few years later, in 1995, I was preparing a talk on the importance of the North Sea and its future outlook. To complete this analysis, I pulled together the excellent field-by-field production data in both the U.K. and Norwegian sectors of the North Sea. After I got these field-by-field numbers laid out, I was stunned at how far the daily production of giant fields like Brent and Forties had fallen. I was also very surprised to see how long it had been since any really large fields (in terms of daily production) were last discovered.
The conclusion I derived from this analysis was that the North Sea would soon reach its peak. But this was in stark contrast to the conventional wisdom at the time. Most published North Sea production forecasts simply took all the new fields projected to come on-stream and added these volumes to a flat production base. I began to finally grasp that all these supply experts were forgetting about depletion! The base rarely stays flat unless it is a giant oilfield, still being ìchoked back” to preserve reservoir pressure.
My next big educational ìbreakthrough” on the power of depletion occurred at the end of 1996 when the IEA issued a major publication entitled ìGlobal Oil Offshore Oil Prospects through 2000”. I spent my entire Christmas holidays in Maine carefully studying the extensive and detailed offshore analysis contained in this volume. David Knapp, then editor of the IEA’s important Oil Monthly Report, had single-handedly authored this book. He did a masterful job of assembling data on the 147 largest offshore oilfields in the world. The book contained production statistics for a large number of these fields from 1990 through 1995. For the first time, I saw what the real decline rates were for not only in the North Sea fields, but for offshore fields around almost all parts of the world, which accounted for over 60% of the world’s new oil supplies added over the past 40 years. I can honestly say that I was a pronounced critic of David Knapp for several years, but he laboriously produced one of the benchmark supply studies of the past three decades, even though its major conclusions were wrong. Today, David Knapp and I have become quite good friends.
While this IEA publication predicted that offshore oil would grow by 6.5 million barrels per day between 1995 and 2000 (an event that never occurred) it carefully laid out the assumptions for this forecast in remarkable detail. It was the first time I began to realize that a wide group of supposed energy experts were assuming the new generation of oil service technology had facilitated enormously our ability to add supplies and also ìreversed the age old decline curve.”
Since our firm’s investment banking client base created most of this oilfield technology, I knew this was not true. All this technology did was create the ability to drain fields faster and create far higher decline rates once new fields peaked. By carefully digesting the IEA’s offshore supply book, I once again received more accidental exposure to the issue of production declines in many large fields, and how increasingly difficult it was becoming to add enough new fields to merely keep daily production flat.
About a year later, I finally read Colin Campbell’s excellent book on the pending end of cheap oil. His discussion of blowout depletion and what the industry does to stem this phenomenon taught me even more about this important and largely ignored topic.
Soon, I began using a series of hand-drawn slides about depletion, its growing fury, how little the world knows about actual decline rates in specific fields, how hard it is to track historical decline rates, let alone project future rates. I also began constantly reminding supply forecasters that it was becoming impossible to do any serious supply forecast unless you had a clear sense of how fast the existing base in each forecasted area was declining.
The more I began speaking on this issue, I found, to my great surprise, how little even key industry players knew about the whole depletion topic. I spoke to groups like the worldwide board of the Society of Petroleum Engineers, the world’s largest professional energy association, to numerous energy workshops ranging from the U.S. Department of Energy (DOE), to forums of the American Petroleum Institute (API) and the International Energy Agency (IEA.) Time after time, I found myself explaining the basics of depletion to people who should have been instructing me about this topic.
One of the slides I have used over 100 times illustrates the projected growth in oil demand and the added amount of oil that needs to be on-stream by 2010 to meet a decline rate in the existing base. The first few times I used this graph, I plugged in an annual decline rate of 3%, which I simply concocted for lack of any real knowledge of the blended global rate. I now use 10%, but I suspect this will be too low. Last fall, for the first time in its history, the International Energy Agency published a similar table illustrating their projected demand growth for 75 to 96 million barrels a day between 1999 and 2010 and then noted that a total of 60 million barrels of new discoveries would be needed by 2010 if the dotted line of depletion was merely 5% per year.
Every time I have raised this subject, not a soul has been able to produce evidence that the depletion issue is not real, nor have I had anyone at anytime layout a credible way that the world could actually add so much added supply within such a short period of time.
One of the things that most troubles me about all this is that I should not have been one of the few people around the globe raising such a crucial issue for the long-term health of the U.S. economy, let alone the rest of the world.
I have also watched, with amazement, the constant whining and complaining of too many world-class energy experts who loudly dispute the excellent work being done by people like Colin Campbell and Jean Laherrere, without a scrap of factual data to support their opposing views. It would be wonderful if some of these wildly optimistic energy economists’ views were right. Sadly, there is no factual data to support their ìsense” that the world will be awash in cheap oil and gas forever.
I have studied the depletion issue intensely for too long now to have any remaining doubts as to the severity of the issue. But I am still amazed at the limited knowledge that exists, even in the U.S. or within our major oil and gas company’s senior management about this topic and its dire consequences.
The U.S. is the one country in the world that should fully understand the topic of oil depletion. After all, we have already experienced the full brunt of what happens when an oil basin begins an irreversible decline. The U.S. also has by far the most accurate and best energy statistics than any country in the world. Moreover, a very large part of our daily oil and gas supply is produced by publicly held companies who are required by law to report on a quarterly basis the amount of oil and gas they produce. Yet there is still only a limited understanding at the highest levels of both public policy energy planners and the CEO’s of our major energy companies about the severity of this depletion issue problem.
While reports that the world was going to run out of oil have been circulated throughout the industry even since Col. Drake first discovered oil, the first time a serious energy scientist produced a major report with detailed numbers and dates predicting the peaking of an important oil province occurred in 1956 when M. King Hubbert published his highly controversial report predicting that the U.S. would peak as the world’s largest oil producer in the early 1970’s. Ken Deffeyes, Professor Emeritus at Princeton, who worked with Dr. Hubbert at Shell Oil Company’s research company in the 1950s, recently published an excellent book on Hubbert’s Peak detailing this remarkable work.
By 1970, this Hubbert Peak theory had been so severely criticized and widely discredited that only a handful of passionate fans of Dr. Hubbert even remembered his prediction. I have personally studied the best energy literature available from 1969 through 1973 and there is no mention anywhere that anyone understood that U.S. oil production was finally peaking in 1970, exactly as King Hubbert predicted in 1956.
The U.S. peaked at a daily production of about 9.6 million barrels per day. A decade later, this base had fallen to 6.9 million barrels per day, despite a drilling boom that produced 4 times more oil wells each year. …
Earlier I remarked on the serious issues facing natural gas. Let me end my remarks by sharing my serious concerns on the supply of U.S. natural gas. A few minutes ago I mentioned our gas-related drilling boom. It was real and it also came to an end last August when gas prices collapsed. By the bottom of its collapse, gas drilling had fallen by 45%. Most gas analysts and many industry executives think that gas supplies will fall by 2% to 4% this year, even though gas drilling fell by 45%. They are making the classic mistake of, once again, misunderstanding depletion, which caused the supply flatness in the first place, despite a drilling boom.
Our firm has just completed an incredibly intensive supply analysis on 53 counties in the state of Texas. These 53 counties represent 66% of Texas’ gas supply. Texas represents 31% of total U.S. daily gas supply. Based on this study, I fear that U.S. natural gas supplies could fall as much as 10% in as little as six months from now. The drop could be close to double this amount by the time it bottoms.
If this happens, it will jolt the U.S. economy far worse than the 1973 Oil Embargo. And unfortunately, there is no quick fix to this supply crisis. America’s electricity grid is highly dependent on an abundant supply of natural gas that must grow by 35% over the next 8 years.
If gas supplies drop by even 5%, there is a good chance that the industry will not be able to get supplies back to the flat levels we enjoyed for the past 8 years.
I fear that 5 to 10 years from now, historians might look back and discover that natural gas in 2002 finally experienced the same fate as U.S. oil did 32 years earlier. If King Hubbert was still alive, he might well be publishing a new study showing that his Hubbert Peak was now occurring in North American natural gas.
How this shapes America’s future and the unforeseen consequences of natural gas supply collapsing will be a watershed event in U.S. history. If the U.S. cannot grow its electricity demand through a lack of ample natural gas, it is hard to see how our economy can grow. If the U.S. economy is curtailed because of a scarcity of energy growth, this puts some severe pressure on many other economies of the world too.
The key energy issue for the U.S. and for the world is depletion. The decline curve of existing oil and gas supply is creating a vicious treadmill that needs an increasing number of wells to be drilled, not to grow supplies but to simply keep the base flat. There is a vast gulf about this whole depletion issue. But, some progress is finally being made on connecting the dots. …
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