ASPO is a network of scientists, affiliated with European institutions and universities, having an interest in determining the date and impact of the peak and decline of the worlds production of oil and gas, due to resource constraints.
It presently has members in Austria, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
- To evaluate the worlds endowment and definition of oil and gas;
- To study depletion, taking due account of economics, demand, technology, and politics;
- To raise awareness of the serious consequences for Mankind.
- 217. Rising Costs of Exploration and Development
- 218. US Gas Crisis the cliff is steepening
- 219. Country Assessment – Iran
- 220. Déjà vu
- 221. The Double Standards of Love and War
- 222. Modern Economics
- 223. Man, Energy, and Society
- 234. Interest in Depletion Awakening
- 235. Middle East broadcast
- 236. Long-distance presentation to South Africa
- 237 Peak Production under the Depletion Model
- 238. Possible e- attacks
- 239 Excellent Summary of the end of the oil age
217. Rising Costs of Exploration and Development
The key contained in the following account of a stockbrokers report, which was probably lost to the analysts themselves, are the words a growing proportion of reserve additions are in the proven undeveloped category. In plain language, Proved Undeveloped Reserves (PUD) mean discovered reserves which are not included for financial purposes. They have been the mechanism used for under-reporting the size of discovery and thereby achieving impressive reserve growth, which so misled the USGS in its 2000 Study. In short, the companies have been far from replacing their reserves by discovery, and have had to resort to these book-keeping adjustments to maintain the illusion. Those days are fast coming to an end, which explains why the industry is belatedly coming to admit to depletion of not only reserves but of prospects too. ExxonMobil has confessed to peak world discovery in 1964; and now Total in its advertising admits that the resource is not infinite, emphasizing how all of its special skills will be called on to produce what is left.
Worldwide finding and development costs on the rise
by the Oil & Gas Journal Editors
HOUSTON, June 11 — The worldwide oil and natural gas industry face increasing challenges in replacing reserves and growing production, according to 2002 statistics from the Merrill Lynch Global Securities Research & Economics Group. Recently, companies have announced missed production targets and have slashed 2003 production forecasts. The study covered integrated oil companies in developed and emerging markets along with US and Canadian exploration and production companies.
The study’s participants had an aggregate market capitalization of more than $1 trillion. Combined 2002 production for the companies studied was 25 million b/d of oil and 76 bcfd of natural gas.
Finding, development costs
Although technological advances led to lower finding and development costs in the early 1990s, F&D costs have increased since 1997, Merrill Lynch analysts said in the May 29 report. Unless capital efficiency improves through renewed technology changes similar to those seen in the early 1990s, finding and development costs are likely to rise because of deteriorating returns within an aging resource base.
“Companies have already captured most of the benefits from earlier breakthrough technologies in mature areas, and are now required to increase their maintenance capital just to maintain production levels from their established production base,” the report said.
Lower costs in emerging countries and the deepwater areas partially offset the struggle to replace reserves in mature areas, but companies are opportunity constrained in these lower-cost areas, analysts said.
“After a dip in F&D costs in 2000, costs have risen even more dramatically in both 2001 and 2002,” they noted. Single-year data showed 2002 F&D costs, excluding acquisitions, were $7.30/bbl or more than double 1997 levels.
Reserves replacement also has been declining since the late 1990s because companies have chosen to limit capital spending instead of pursuing higher-cost projects.
“Despite the fact that oil prices have averaged over $23/bbl since 1997 and $28/bbl since 2000, the integrated oil companies have conservatively established a normalized oil price of $18-20/bbl in determining whether they will pursue new projects. Our view is that a normalized oil price in the $24-26/bbl range is likely for the foreseeable future.”
For the Merrill Lynch global oil universe, reserve replacement has declined from 130% of annual production in 1998 to 122% in 2002, excluding acquisitions and sales.
“Increasing F&D costs and flat capital spending suggest that industry reserve replacement figures will likely decrease further in the future,” the study said.
Meanwhile, a growing proportion of reserve additions are in the proven undeveloped category, suggesting that the quality of the total reserve, the base may be deteriorating, analysts noted.
Despite a surge in cash flow starting in 2000, the core integrated oil companies only recently increased total spending to 1997-98 levels of $54 billion/year, the report said.
“A reluctance to spend, coupled with higher F&D Costs have resulted in weaker production growth than many analysts had anticipated. Going forward, we see no signs that the industry intends to increase its level of capital spending significantly,” Merrill Lynch analysts said.
They anticipate future disappointments in both individual company volume growth and also total volume growth from outside the Organization of Petroleum Exporting Countries.
218. US Gas Crisis the cliff is steepening (Reference furnished by Bruce Robinson)
The above plot reproduced from an important paper by Dale Allen Pfeiffer in the From The Wilderness Publications says it all. As each year passes, the cliff of depletion becomes steeper.
The attached plot from Jean Laherrere for North America as a whole tells the same story. It is noteworthy that the US chemical industry that faces foreign competition is vying for supplies against the electricity industry with its captive market. Of particular concern is the effect on synthetic fertilizer production, given the thirst of the new genetically modified crops for these nutrients. America remains a major producer of the world’s wheat, which means food supply. When they remove the life support systems, the patient tends to be in trouble.
219. Country Assessment – Iran
Index of country assessments with Newsletter Reference
Iran, previously known as Persia, covers an area of 1.6 million square kilometers and supports a population of some 70 million, making it the most populous of the Middle East countries. Most of the country lies on a plateau with an elevation of about 1000m, which is surrounded by mountain ranges. The Elburz Mountains in the north rise above the Caspian Sea to over 5500m, while the Zagros Mountains, with their oil-bearing foothills, flank the Persian Gulf. It is a mainly dry country with an extreme range of temperature from sub-zero winter temperatures in the Northeast to a summer high of over 50 oC on the shores of the Persian Gulf.
It has had a long history, going back beyond classical times, before falling under Greek dominion with the conquests of Alexander the Great in 330 BC. The country then splintered into smaller kingdoms, which were eventually reunited with Ardashir and his son Shapur to form a new empire, extending through what is now Iraq and much of Turkey to the Mediterranean coast. It faced various conflicts with the Roman Empire.
The birth of the Prophet Muhammad in Saudi Arabia in about 570 AD opened a new chapter of Arab influence that extended into Iran. On his death, a schism developed over the succession. The Iranians favored Ali, the Prophets son-in-law, giving rise to the Shia sect of Islam, which has served to isolate Iran to some extent from much of the rest of the Sunni-dominated Islamic world. Later, starting in the 13th Century, the country was subject to successive vicious Mongol invasions, followed by conflict with the Ottomans of what is now Turkey. It began to fall under European influences in the early 19th Century is the object of a certain rivalry between British and Russian imperial and commercial ambitions. The latter included a highly significant development, when General Kitabgi successfully persuaded William Knox Darcy, a British entrepreneur, to develop the country’s oil possibilities. It was already well familiar with the oil developments in the adjoining Caspian and was encouraged by numerous oil seepages observed in the Zagros Foothills. A 60-year concession was signed in 1901, with a £20 000 signature bonus being the final inducement. After seven long years of costly disappointment, the investment was vindicated when at 4:30 am on the morning of May 26th, 1908, a well being drilled at Masjid-i-Sulaiman blew out, sending a jet of oil fifty feet into the air. It was an event that changed the world.
In July 1914, a few weeks before the outbreak of the First World War, Winston Churchill persuaded the British government to take a 51% stake in Darcy’s enterprise, seeing it a source of superior fuel for the Royal Navy. The Anglo-Persian Oil Company was formed, later becoming British Petroleum or BP.
Various intrigues between British and German sympathizers marked the war years. The Germans succeeded in controlling a Swedish-officered gendarmerie, as well as the loyalty of several tribes; Russian-officered Cossacks controlled the northeast, and a British army from India controlled the oilfields. Iran as a country had almost ceased to exist, facing famine and insolvency. These difficult conditions paved the way for a coup de tat in 1921 by Reza Khan, an army officer, who established himself as the country’s leader in 1925, founding the Pahlavi dynasty. He moved to modernize the country, eventually negotiating better terms with BP in 1933, and changed its name to Iran two years later. Coming under increasing pressure from Britain and Russia, he turned towards Nazi Germany in the years leading up to the Second World War, when British and Soviet forces occupied the country. He was forced to abdicate in 1941 for his son.
As peace returned, the country’s growing need for revenue to pay for modernisation culminated in a decision by the Parliament under the new Prime Minister administration, a land-owning aristocrat by the name of Mohammad Mossadegh, to nationalize BPs exclusive concession. That too had incalculable consequences for the world as a whole, leading other oil producers to follow suit, distorting the natural pattern of depletion that would otherwise have unfolded gradually, had the major companies remained in control of world oil.
The Shah retained close relations with the United States, which was not disappointed when a consortium was formed to resume oil operations. BP returned to its once exclusive position with no more than 40%, having been forced to make room for the major American companies. They were eventually persuaded to pay compensation for what they had taken.
The first oil shock in 1973, in which Iran played no direct part, led to re-negotiation of the consortium agreement, whereby the national company, NIOC, took over operations, selling the oil to the companies. In parallel with this step, the Shah embarked on a policy of rapid industrialization, fearing over-dependence on oil revenue. But the changes were not popular or successful, prompting demonstrations, anti-Western feeling and the re-emergence of the traditional values of Shia Islam. An exiled cleric, the Ayatollah Khomeini, called for the abdication of the Shah, who fled the country in January 1979. His fall led to panic buying as oil traders feared another interruption in the Middle East supply, forcing oil prices to nearly $50 a barrel (or about $100 in today’s terms), which triggered the Second Oil Shock, plunging the world into a long recession.
Khomeini returned to lead the new Islamic Republic, as anti-American sentiment exploded, leading to demonstrations in which 66 American subjects were held hostage in their Embassy. President Carter ordered an unsuccessful military mission to release them, which further soured relations. But Khomeini himself also faced internal opposition, which caused him to impose various forms of repression.
Most of the countries in the Middle East contain substantial ethnic and religious minorities. The Kurds have long sought independence, and the Shiites of Iraq, having ties with Iran, have posed problems there. In 1980, Iraq took the opportunity of the fall of the Shah to quash Shiite influence. It re-opened a border dispute over the strategic Shatt-al-Arab waterway, its outlet to the Persian Gulf, invading Iranian soil and threatening the oil fields. It was repulsed but a long war of attrition, lasting almost eight long years, ensued with appalling losses on both sides. The United States covertly supported Iraq with weaponry, finance, and intelligence, perceiving Iran to be its prime enemy in the region.
Khomeini died of a heart attack in 1989 and was succeeded by Khamenei, with Rafsanjani a more moderate leader becoming President. He sought to build better relations with the West to attract investment while retaining traditional Islamic values. He, in turn, was succeeded in 1997 by Khatami, the current President, who continues to espouse moderate policies, aimed at better relations with the United States and Saudi Arabia, with which past relations were also strained. Foreign oil companies began to be invited to return the country, but new tensions flared about the Sunni Taliban regime of neighboring Afghanistan.
In geological terms, the eastern flank of the Persian Gulf basin extends into Iranian territory both onshore and offshore. The great onshore fields lie in the classic setting of the Zagros foothills, where huge anticlinal structures have formed above a glide-plane provided by a layer of salt. They are in part gravity structures as sediments slipped off the rising mountains. The prime source-rocks are deeply buried Jurassic clays, which in southern Iran have been depressed into the gas-generating window, but there are also leaner, yet still prolific, source-rocks in the Upper Cretaceous and Eocene sequences. The main reservoirs are found in fractured limestones of the Miocene Asmari Formation. Pliocene evaporites give effective seals to the reservoirs, which as a result have exceptionally long oil columns, commonly with substantial gas caps, possibly being partly recharged from depth. They are not easy reservoirs to manage to be prone to high-pressure gas invasion.
About 350 wildcats have been drilled since exploration commenced in 1902, finding approximately 120 billion barrels. This is a comparatively low number but has probably been sufficient to find the bulk of the country’s oil, at least onshore, given the ease with which it is possible to identify the major prospects. Most of the discovery to-date lies in a few giant fields as listed below, which were mainly found by the Consortium in the 1960s based on prospects, long known to BPs explorers. The Azedegan Field discovered in 1999 was a late find by NIOC on such a prospect that was not drilled earlier because it lies in a sensitive area near the Iraqi frontier. It is reported to contain about 5 Gb in two reservoirs, but the estimates are being revised downward. There have been recent reports of major discoveries at Bushehr, but it turns out that they are almost certainly long-known deposits of high sulfur heavy oil of no particular significance. Their announcement at this time speaks of political motivation, possibly stemming from Sino-Japanese rivalry for access to Iran. Future discovery is here estimated at 8 Gb, probably mainly coming from the offshore.
The country’s gas resources were very large indeed, totaling some 1000 Tcf. They are dominated by South Pars with about 350 Tcf, which is an extension of the North Field of Qatar, the worlds largest hydrocarbon accumulation, found in 1971. Present reserves for the country are reported to be 812 Tcf, but may, in fact, be closer to 700 Tcf. Production stands at 6.2 bcf/d, (2.2 Tcf/a). With consumption at 6.6 bcf/d, it implies that the country imports 0.4 bcf/d if the statistics are to be believed. Quite possibly the discrepancy relates in some way to the substantial amounts of gas being re-injected into the reservoirs.
Iran was a co-founder of OPEC in 1961, and its oil production has the typical twin-peaked profile of an OPEC country. The first peak was passed in 1974 at 6.1 Mb/d, falling to a low of 1.2 Mb/d in 1980, before recovering to 3.4 Mb/d in 2002. Some reports suggest that depletion of present reserves is running as high as 7%, which may reflect operational shortcomings and lack of investment.
Iran is here treated as one of the five swing countries making up the difference between world demand and what the other countries can produce. World demand is assumed to be on average flat to 2010 under the Base Case Scenario due to continuing recession, caused in part by recurring high oil prices as falling capacity limits are successively breached. As so modeled, production could in resource terms rise to a second peak in 2009 at almost 5 Mb/d before commencing its terminal decline at 2.6% a year, but operational and investment constraints may prevent such a level being reached in practice, with 3-4 Mb/d peak being perhaps more likely. Naturally, any new invasion would radically affect this forecast.
The country currently exports about 2.3 Mb/d, declining to about 1Mb/d by around 2040, assuming flat demand and the depletion profile as modeled. If oil prices rise radically as world shortages bite in earnest in the years ahead, Iran would have ever less incentive to step up production, as higher oil prices would maintain revenue and allow the resources to be conserved for longer. Much depends on whether or not the foreign companies re-enter the country. They would produce at the maximum rate, with the advantage of being able to write off operating expense against taxable income in their home countries, whereas the national company is forced to move more slowly drawing its funds from the national budget of which there are many competing claims. The slower approach would better serve the long-term national interest.
220. Déjà vu
Unlike his present successor, the British Prime Minister of 1915 expressed himself unenthusiastic for an Iraqi adventure with the following prophetic words: Taking on Mesopotamia [Iraq] means spending millions on irrigation and development with no immediate or early return; keeping up quite a large army, white and coloured, in an unfamiliar country; tackling every kind of tangled administrative question, worse than we ever had in India, with a hornets nest of Arab tribes
221. The Double Standards of Making Love and War
Some people find it curious that Mr. Clinton was impeached, whereas Mr. Bush has not, despite the greater misdemeanor of taking his country to war with the attendant loss of life, on what is now widely recognized as fabricated, exaggerated or distorted evidence. The British government now accepts that no offensive weapons will be found in Iraq, lamely suggesting no more than there might have been plans to develop them. It does not take much imagination to discover the real reason for the attack, namely as part of a global strategy to control oil supply. It might be a worthy cause but is certainly different from the one presented.
Mr. Blair meanwhile says that history will forgive him for the invasion, implying that he was guilty of something, presumably alluding deception. It remains to be seen if the families of the lost troops and bombed Iraqis will be as generous. A British micro-biologist, who had been a prominent member of the UN inspection team in Iraq and had informed the BBC of the true position, has been found dead in wood with his wrists cut.
222. Modern Economics (Reference furnished by John Attarian)
The world is suffering from the baleful influence of old classical economic theories inherited from the Industrial Revolution, which is based on perpetual growth driven by usury in an open market of unlimited supply and demand. But Modern Economics are now taking their place in a hopeful new direction. A good summary of the ideas and contribution of Herman Daly to this critical advance is contained in The Social Contract v.8 n.3 (see www.thesocialcontract.com).
The US budget deficit will run to $455 billion this year with the national debt rising by almost two trillion dollars over the next five years. It may be a form of economic stimulus under flat-earth principles, but it sounds as if there may be a day of reckoning if foreigners lose confidence in the dollar in the face of the looming energy crisis, which will not be easily concealed. Unemployment is already at a 20 year high. It may substantiate the view, voiced by Ken Deffeyes, at the Paris ASPO Meeting, that peak oil production may turn out to have been in 2000 as much from falling demand as supply constraints. As depletion bites deeper in the years ahead, it will be increasingly difficult to step up production even if demand should increase.
223. Man, Energy, and Society
Earl Cook wrote a very perceptive book with the above title in 1976 (Published by W.H.Freeman), in which he addressed, amongst other things, the moral issues of depleting the energy resources of others, questioning the right of the rich to take from the poor. (Reference furnished by Prof. K.E. Watt) .
In Britain during the Second World War when nearly everything was in short supply, there developed a class of people, known as spivs, who operated a black market set by the scarcity value of products which they somehow secured by dubious means. They were universally condemned as moral outcasts. With the return of peace, the government moved to eradicate such racketeering. Rent Acts were passed to prevent landlords from profiteering from a wartime shortage of housing, and to this day a Monopolies Commission operates to prevent any company controlling a market.
Classical economic theories maintain that in open market prices will always fall to the cost of efficient production, such to include not more than a modest profit element needed to maintain the capitalist system. To this day, the European Union presses for the so-called liberalization of the energy market, aiming always to reduce costs to the consumer. It reflects conventional economic wisdom but is fundamentally flawed in the face of the depletion of the resource as imposed by Nature.
So, an urgent need arises to impose a system with the objective of raising the cost to the consumer to reflect the growing natural shortages, without at the same time allowing the producer to profiteer from the growing scarcity. Increased consumer costs would serve to avoid the current monumental waste, and encourage the development of renewable energies from wind, sun, rain, and tide as well as safe nuclear systems which are needed as substitutes for depleting oil and gas. Unless this is done, the Middle East countries, for their part, will be cast as profiteers, a role already long attributed to an unjustly vilified OPEC. They may find themselves under military attack from flat-earth crusaders, wearing cloaks of perceived moral rectitude, who are bent on preventing them exploit shortage to their benefit. In reality, the OPEC countries themselves also suffer from such unearned wealth which leads to an unsupportable level of population that is not at all prepared for the progressive decline in the proceeds of the inheritance with which Nature endowed them during the Jurassic.
A different policy is needed. The costs of oil and gas to the consumer should rise greatly to reflect the growing shortage from depletion as imposed by Nature, without at the same time allowing the producing governments to exploit the scarcity values of their product. We return to the idea of a Depletion Protocol, which has already been proposed in these pages several times. It would require both producers and consumers to recognize the concept of Depletion Rate, namely annual production as a percentage of what is left to produce. The consuming governments would be required to cut imports to match the depletion rate of the producers. It would place management of the problem squarely on the shoulders of the consumers, who are responsible for the depletion, leaving the producers with a normal profit margin on the costs of production.
The flat-earth economists, who heavily influence governments with their flawed rejection of physical resource constraints, might even come to accept such an evolution, which in a certain sense preserves the shrine of the Open Market, albeit this time is driven by conscious restraint by the consumer. After all, the market is not that open when it accepts the huge hidden subsidies provided by the tax system, which allows operating expense, covering both a wide spectrum of benefits and risk reduction, to be treated as a deduction against taxable income.
The producers would initially suffer from the progressive removal of their unearned income but would benefit in other ways. First, they would become less obvious targets for military attack, and second, they would find themselves being forced to adapt progressively to the natural decline of their oil revenues consequent upon inevitable depletion, leaving them better prepared to meet the future.
This line of reasoning will be presented at a prestigious Conference to be held in Rimini in Italy in October under the aegis of Mikhail Gorbachov, Al Gore, and Henry Kissinger. Perhaps it should become one of the tenets of ASPOs mission. Now is the time to adopt such measures before oil and gas prices rise to dizzy heights greatly inflaming the issue.
234. Interest in Depletion Awakening (Reference furnished by Hugh Sharman)
The June 30th issue of the Oil & Gas Journal, perhaps the oil industry’s most widely read journal, carried a prominent report of the ASPO workshop in Paris. It was followed by an article by Holtberg and Hirsch, which unfolded all the old saws about technology increasing recovery; deepwater areas offering limitless potential; the world lacking the drilling intensity of Texas, and conventional oil being at the top of a resource pyramid to be progressively tapped as the need arises. It further misrepresented Campbell & Laherrères study in the Scientific American as being based on a 30% recovery factor, which is not the case. It did correctly emphasize that peak production is a much more critical issue than final exhaustion and that Reserve to Production Ratio quoted in years (resource life) by current production levels is a meaningless measurement, given the natural decline observed in all oilfields. Neither of the authors admits to oil industry experience and can be forgiven for their somewhat facile analysis.
On July 7th came a notable article by Bakhtiari entitled Middle East oil production to peak within a decade with a perceptive recognition of depletion.
A special issue of depletion followed on July 14th, with an even-handed editorial stressing the critical importance of the subject.
Meanwhile, the Government of Western Australia issues a perceptive report on the impact of oil depletion, carrying a telling introduction by the Manager of BP in Australia opening with the words
When a skipper knows there is a big storm on the horizon he can make for a safe harbor or sail on making the best preparations possible.
To speak of a storm is in remarkable contrast with the bland pronouncements issued by the image- makers of his head office who deny the existence of even a cloud in the sky. The report reproduces the ASPO depletion model. (Reference furnished by Bruce Robinson)
235. Middle East Broadcast
Kjell Akeklett, the President of ASPO, was interviewed at length on the al-Arabiya satellite station, which is based in Dubai and has a wide coverage throughout the Middle East. Explained the basic issue of peak oil.
236. Long-distance presentation to South Africa
On July 17th C.J.Campbell gave a one-hour presentation on oil depletion to the South African National Committee of the World Petroleum Congress, followed by lengthy questioning. It was achieved by a phone link between a village in Ireland and Johannesburg, which was in turn linked by video to the second meeting in Cape Town. It underlines the progress of modern communications.
237. Peak Production under the Depletion Model
The attached spreadsheets summarize the results of the current depletion model, listing countries in order of peak. Fifty-one of the sixty-four countries are past peak and set for long-term decline whatever the short term fluctuations. The time lag between peak discovery and peak production is shown.
Also included are less sure estimates of future production of gas, gas liquids and Non-Regular oils. The study evolves all the time as new information and insights come in. The estimates are far from sure, but are thought to depict the situation in terms of order of magnitude. The countries with most Regular Oil left to produce, headed by Saudi Arabia and Iraq, with Iran in fourth place, are shown in the plot. It is easy to see the targets for tension, military and otherwise. Suggestions for ways for improving the model are always welcome. One slightly implausible aspect of a model based on current depletion rate is the amount of oil left to produce after 2050 in some of the larger countries. Perhaps, after all, there is a case for reverting to a Hubbert-style steeper decline for post-peak production. The flanks of the Hubbert curve seem stronger than the peak itself, which is perhaps not surprising as times of inflection are always uncertain. The world implications would be that much more serious.
238. Possible e-attacks
Several members associated with ASPO have been subject to e-mail assaults whereby the senders name is used but under a different server. The message, which appears at first sight to come from a legitimate source, contains an attachment with a virus. This may be a more deliberate and specifically directed assault than the random viruses, which permeate the Internet. It may become impossible to distribute this newsletter directly by e-mail.
239. Excellent Summary of the end of the oil age
The Newsletter very much welcomes contributions from ASPO members and other readers, who wish to draw attention to items of interest or the progress of their research.
Permission to reproduce the Newsletter, with due acknowledgement, is expressly granted.
Compiled by C.J.Campbell, Staball Hill, Ballydehob, Co. Cork, Ireland