“Peak Oil” hypothesis is following “Peak Gas” into oblivion

Oil production from oil shales in North Dakota is increasing rapidly and the much-heralded “peak” of oil production may have to be postponed. Alarmists will not be pleased.

“Peak Oil” and “Peak Gas” are the points in time where the production of oil and gas respectively reach a peak and then decline to zero. The concept is based on the normal production cycle of an individual well extrapolated to all the oil and gas existing. The fundamental flaw in these hypotheses when trying to apply them to “finite” and exhaustible resources of any product is of course that:

  • new sources of the product are discovered
  • new extraction technologies enhance what can be recovered from existing sources,
  • new technologies make non-viable sources viable
  • new technologies allow the synthesis or alternative production of the product (price driven)
  • consumption is modified by pricing

Moving peaks

In recent times the development of fracking technology and the discovery of huge deposits of gas-bearing shales together with the discovery of new deep-sea sources of natural gas have pushed the “peak” for gas production beyond the visible horizon and into the distant future (a few hundred years). When – rather than if – methane hydrates become available for gas production, the “peak” will shift further into the future.

In the case of oil there are already many feasible alternatives which are technically feasible but where commercial production by these methods can only be triggered by the sustainable price being higher than the production cost. For example bio-diesel costs are commercial with oil prices above about $70 per barrel but there is a hidden cost in decreased or disrupted food production. Coal liquefaction would need oil prices above $120 per barrel while oil extraction from oil shales and oil sands become commercial at about $90 and $100 respectively. Deep sea wells (new exploration) are increasingly commercial as the price increases.

The alternatives are now coming into play:

…. A decade ago, shale drilling wasn’t a well-known technique outside of the industry, much less a major contributor to our oil production. Today, Kodiak Oil & Gas, Continental Resources, and Whiting Petroleum have turned the desolate North Dakota prairie into an energy bonanza by unlocking shale oil there. Offshore drilling has also grown by leaps and bounds. Drillers like  SeaDrill ,Transocean , and Noble are building ultra-deepwater rigs as fast as they can to unlock new fields off the coasts of Brazil, Angola, and other parts of the world that were once out of our reach. 

Then there are Canadian oil sands, which hold the second-largest oil reserves in the world, behind Saudi Arabia. These developments alone unlocked enough oil to delay peak oil for a few more years at least.

Evidence that these innovations have turned peak oil on its head is undeniable. According to Bentek Energy, North American oil production will top a 40-year-old peak by 2016. The U.S. Energy Information Administration predicts that by 2020, U.S. oil production alone will grow another 20% to 6.7 million barrels per day. Even OPEC’s surplus oil production capacity is expected to increase from 2.55 million barrels per day in 2011 to 3.92 million barrels per day by the end of 2013.

Just as for gas, the oil “peak” is now moving into the future.

The Wall Street Journal writes:

Citigroup announced to the world Thursday that peak oil is dead. The controversial idea that world crude oil production is almost at its peak and will soon begin an irrevocable long-term decline has been laid to rest in the highly productive shale oil formations of North Dakota, with potentially big consequences for oil prices, the bank said. …. 

Changes in oil markets in the past decade have given significant traction to the argument that world oil production is close to peaking. Despite the huge incentive of a near-threefold increase in the price of benchmark Brent crude from 2000 to 2010, the world barely managed to eke out a 10% increase in crude oil production, according to BP data.

Many have argued that this proves the physical limit on global crude oil production is near, or may already have been passed.

“The belief that global oil production has peaked, or is on the cusp of doing  so, has helped to fuel oil’s more than decade-long rally,” Citigroup said in a note to clients. “This is now all changing because of what is happening in North Dakota,” where new technology has led to a large and unexpected surge in oil production from shale rock.

After decades of decline, “U.S. oil production is now on the rise, entirely because of shale oil production,” said Citigroup. Shale oil could add almost 3.5 million barrels a day to US oil production between 2010 and 2022 and has already slashed 1 million barrels a day from U.S. oil imports. One day it may allow the U.S. and Canada to be self-sufficient in oil, it said.

There are other parts of the world with similar promise, the bank said. Argentina has already discovered significant shale oil deposits. Australia may have shale reserves. 

…. Despite this optimism, it’s a fair bet that not everyone will be convinced. Indeed, there is good reason to be skeptical that the world’s oil production can be forever buoyed by new technology. This is the fact that, year in year out, oil production from existing areas like the North Sea or Alaska declines steadily, meaning the industry must run just to stand still. …

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