The Future of Oil - 2010 to 2035

Now that we've seen West Texas Intermediate prices flirting with the $100 a barrel mark yet again and OPEC maintaining its production level at 30 million BOPD, I thought that it was time to take a look at the latest World Energy Outlook (2011) from the International Energy Agency (IEA) and see what they predict for the world's energy markets, focussing on oil, for the next 25 years.

First, let's look at the 3 year chart for West Texas Intermediate noting the steady rise in price from the lows of late 2008:

Now, let's look at the 3 year chart for Brent once again noting the dramatic rise in price from the lows of late 2008:

The IEA opens by noting that energy demand is expected to rise by one-third between 2010 and 2035 due to population growth which is estimated at 1.7 billion people and average annual economic growth which is estimated at what appears to be a rather robust 3.5 percent.  While slowing recent economic activity may have an impact on energy consumption over the coming years, over the 25 year period, it makes only a marginal impact on consumption growth.  Here is a graph showing the increase in demand for various forms of energy over the next 25 years (in blue):

Notice that both natural gas and renewable forms of energy fulfill the largest portion of the increased demand for energy.  The impact of renewables results in an overall drop in demand for fossil fuels  from 81 percent of all energy used in 2010 to 75 percent in 2035.

Population and economic growth is uneven throughout the world with non-OECD nations comprising 90 percent of growth and 70 percent of growth in economic output.  As a result, in the next 25 years, non-OECD nations account for 90 percent of the increase in energy demand.  Two nations, China and India , account for 50 percent of the growth in energy demand as shown on this graph:

By 2035, China consolidates its position as the world's largest energy consumer, consuming 70 percent more energy than the United States despite the fact that its per capita consumption is less than half the level of the United States.  Growth in energy demand for India is even faster than that of China as more and more of its rural citizens strive to reach the middle class and expect to share in the benefits.

Now, let's focus on oil.  By 2020, China is projected to take over first place from the United States as the world's largest oil importer and by 2035, it is anticipated that China will import over 12 million BOPD.  By 2035, 80 percent of the oil consumed in non-OECD Asia is sourced from imports, up from just over 50 percent in 2010.  This is largely due to natural declines in domestic Asian production.   By 2015, even the EU nation states will import more oil than the United States, largely because of rising U.S. oil output from tight formations (think fracking) and improved efficiency.  Here is a graph showing the changes in oil imports for the next 25 years:

World oil demand is projected to rise from 89 million BOPD in 2010 to 99 million BOPD in 2035 despite improvements in fuel economy technology.  While alternative fuels (i.e. electricity) are starting to appear in the transportation sector, it could take decades before new technology significantly impacts the use of oil as a transportation fuel.  Here is an interesting graph showing the projected changes in the vehicle purchases by nation over the next 25 years: 

The world's total vehicle fleet is projected to double in size to 1.7 billion vehicles in 2035 with most new cars sold in non-OECD nations by 2020.  Notice the increased market penetration of vehicles in both China and India.  As a result, non-OECD nations will become increasingly important to the oil demand scenario.

On the supply side of the oil ledger, conventional crude production is expected to remain constant before declining slightly to 68 million BOPD by 2035.  Most oil will be sourced from the Middle East and North Africa (MENA), with the area accounting for over 90 percent of the required growth in output needed to maintain supply - demand balance.   The IEA estimates that, to develop the productive capacity of the MENA region, an annual investment of $100 billion will be required.   To compensate for production declines over the next 25 years, 47 million BOPD of gross production additions are needed; to put this into context, this is twice the volume of oil currently produced by all Middle East OPEC nations!  This will require an investment of $10 trillion over the next 25 years.  As a firm believer in Peak Oil, I would suggest that this reserve and production replacement scenario is highly improbable.  With my background as a geoscientist in the oil industry, I find this graph from BP's Statistical Review of World Energy most compelling:

Note the non-descript grey line in the middle of the graph.  That's the world's reserves-to-production (R/P) ratio.  Note that since 1985, the R/P ratio has not increased despite the trillions of dollars spent on oil exploration and exploitation and the new technologies that have allowed production from ultra-deep water and ultra-tight formations.  The world is on an oil treadmill with resource discovery staying just level with oil consumption.  If not for the one-off reserve additions in Latin America, the situation would be far worse.  As I stated above, the odds of adding an additional 47 million BOPD of new production to compensate for natural declines are rather low.

The IEA suggests that part of the increase in oil production required could be sourced from natural gas liquids (18 million BOPD by 2035) and 10 million BOPD from unconventional sources.  As shown in this graph, the largest oil production increases are sourced from Iraq, Saudi Arabia, Brazil, Kazakhstan and Canada:

Additionally, 4 million BOPD of biofuels are required to balance the ledger, a scenario that will require massive subsidies by governments who will, at that point in time, already be handicapped by unserviceable levels of sovereign debt making that part of the scenario less likely to occur.

As I have noted in previous postings, it is demand from the non-OECD Asian nations that will drive the energy markets in the coming decades, particularly the world's oil market.  According to the United Nations, 1.3 billion people in the world do not have electricity and 2.7 billion people still rely on biomass for cooking.  As these people strive to reach the middle class over the coming years, their energy consumption will, quite naturally, rise in lockstep with their improved lives.  This increasing demand will occur at the same time as the world's conventional sources of oil dwindle.  My suspicion is that the looming scarcity of the one resource that led to the rapid industrialization of the world in the first half of the 20th century will also lead to the world's next major geo-political conflict, particularly as prices for fossil fuels rise to the point where we are all very uncomfortable.

The World of Oil According to BP - 2010 In Review

BP has once again released this year's version of its Statistical Review of World Energy.  This publication is widely used by energy industry analysts and employees and is considered by many to be the energy industry standard.  Let's take a brief look at how 2010 looked for the world of energy according to "Beyond Petroleum".

BP notes that global energy consumption rose by 5.6 percent on a year-over-year basis, the largest annual growth since 1973.  This is an interesting statistic considering that average oil prices for the year were the second highest on record.  Coal prices were high in Europe but weak in both North America and Japan and natural gas prices were strong in the United Kingdom and weak in the United States where unconventional gas drilling (shale gas and other tight gas lithologies) flooded the market with natural gas.

Many recent projections of longer term global energy use propose that the so-called developed nations of the OECD will see their energy consumption drop over time as their economies become more energy efficient and that the bulk of the growth in future energy use will come from the non-OECD nations of Asia.  This was not entirely the case in 2010.  OECD consumption grew by 3.5 percent, the highest growth rate since 1984 and is now roughly at the same level as it was in 2000.  Non-OECD energy consumption grew by 7.5 percent year-over-year and is now up a rather astounding 63 percent since 2000.  China is now the world's largest energy consumer, using 20.3 percent of the world's total, up 11.2 percent year-over year.

Now let's take a look at the year that saw oil prices rise to levels that have only been seen once before, just prior to the Great Recession of 2008.  Let's look at the demand side of the equation first, followed by supply and then price.

On the demand side, globally, oil is the world's most used fuel, commanding 33.6 percent of the world's total energy consumption.  During the two previous reports for 2008 and 2009, BP noted that oil consumption declined on a year-over-year basis.  Not so in 2010.  Oil consumption reached a record 87.4 million barrels, up 2.7 million BOPD or 3.1 percent.  Interestingly enough, while this growth is rather robust, it is actually the weakest growth among all fossil fuels.  OECD oil consumption grew by 480,000 BOPD and non-OECD consumption grew by a record 2.2 million BOPD or 5.5 percent with China's consumption alone rising by 10.4 percent or 860,000 BOPD. Growth in net imports from China (growing at 14.6 percent) and Japan (growing at 7.1 percent) led the world.

On the supply side, global oil production rose by 1.8 million BOPD or 2.2 percent.  Looking back one paragraph, you'll note that production growth fell short of the growth in consumption.  In 2010, OPEC nations produced 41.8 percent of the world's oil.  Production by OPEC nations rose by 960,000 BOPD or 2.5 percent with production growth from Nigeria and Qatar leading the pack.  Production by non-OPEC nations rose by 860,000 BOPD or 1.8 percent, the largest increase since 2002.  Production growth was led by China, Russia and the United States.  Production decreases were most notable in Norway and the United Kingdom.

Now that we've looked at supply and demand, let's look at something that concerns all of us that consume oil (which is all of us) - the price of the commodity.  Brent crude (Europe's benchmark crude) averaged $79.50 per barrel over the year, still nearly $18 per barrel below the highs hit in 2008 but up 29 percent from its level in 2009.  In large part, production allocations by OPEC led to supply constraints and helped Brent reach a peak of $94 per barrel on the year.  For your information, Brent reached a high of just over $125 per barrel back in April 2011 and is trading in the $115 per barrel range now.  By comparison, West Texas Intermediate, North America's benchmark crude, was trading at just over $90 per barrel at the end of 2010 and reached a high of $114 per barrel in May 2011.

As a geoscientist, I am prone to flip to the reserves-to-production (R/P ratio) page because I find that it tells me the macro picture of the world's oil industry.  According to BP, the world's proven oil reserves reached 1383.2 thousand million barrels and were sufficient to meet the world's oil demand for 46.2 years.  This is down from the previous year, largely because the world's oil consumption rose rather dramatically (as noted above) and its proven reserves rose only slightly.  One note of interest is the change in Venezuela's official reserve estimates.  This revision drove the country's R/P ratio to 93.9 years from its previous 40 year life.  Venezuela now has the world's longest reserve-to-production life, surpassing that of the Middle East as shown in this graph:

Venezuela claims that they now have 15.3 percent of the world's proven oil reserves just behind Saudi Arabia at 19.1 percent and well ahead of third place finisher Iran with 9.9 percent.  To compare, the United States has only 2.2 percent of the world's oil reserves and Canada has 2.3 percent.  

Let's take a brief look at what the International Energy Agency (IEA) had to say in their monthly Oil Market Report released on June 16th, 2011.  The IEA predicts that global demand will reach 89.3 million BOPD by the end of 2011.  Global oil supply rose to 87.7 million BOPD in May after dippling to  87.4 million BOPD in April 2011 with OPEC supply rising by 210,000 BOPD to 29.18 million BOPD.  This is still 1.25 million BOPD below the level prior to the Libyan crisis.  China's oil consumption is expected to reach 9.9 million BOPD by the fourth quarter of 2011 and is expected to average 9.7 million BOPD over the entire year compared to 9.1 million BOPD in 2010 and 8.1 million BOPD in 2009.  That works out to a 19.75 percent increase in demand over a two year period.  Non-OECD nations will see their demand rise from 41.8 million BOPD in 2010 to 43.3 million BOPD in 2011.  Both demand numbers are up from 39.5 million BOPD in 2009.  With these statistics in mind, it is apparent that unless China's economy implodes, they will be the country that drives future oil demand and price.

As I have stated in other postings, I feel that the reserve-to-production (R/P) number or reserve life index is the key to the future of oil production and consumption.  As shown in the graph above, this number has remained static since the late 1980s despite ultra deepwater drilling, drilling in increasingly hostile environments, the growing exploitation of oil sourced from tar sands and the massive upgrade to the volume of recoverable oil in Venezuela.

In my estimation, the reserve life index number is telling us that peak oil is on our doorstep….or behind us.  Only time will tell.

In a future posting, I’ll examine the world’s natural gas situation, particularly in light of the massive shale and tight lithology exploration and exploitation that has taken place in many of the world’s sedimentary basins.  It is most interesting to think that natural gas may be the fossil fuel that bails the world out of a very sticky energy situation.

Peak Oil? An "Inconvenient Truth"

Remember the WikiLeaks cables?  You'd hardly know that they are still being released, but there are still some interesting Department of State cables appearing in the public domain.

On February 8th, the Guardian released a WikiLeaks confidential cable from the Embassy in Riyadh after Consul General John Kincannon met with Dr. Sadad al-Husseini, the former Executive Vice President for Exploration and Production at Saudi Aramaco, Saudi Arabia's oil production and exploration company.  The two men met on November 20th, 2007, just prior to the massive increase in the price of oil that the world's oil markets experienced in 2008.

Here's what Dr. al-Husseini had to say in discussion with the Consul General:

“It is al-Husseini's belief that while Aramco can reach 12 million b/d within the next 10 years, it will be unable to meet the goal of 12.5 million b/d by 2009. The former EVP added that sustaining 12 million b/d output will only be possible for a limited period of time, and even then, only with a massive investment program.

According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described and the timeline for their production not as unrestrained as Aramco executives and energy optimists would like to portray. In a December 1 presentation at an Aramco Drilling Symposium, Abdallah al-Saif, current Aramco Senior Vice President for Exploration and Production, reported that Aramco has 716 billion barrels (bbls) of total reserves, of which 51 percent are recoverable. He then offered the promising forecast - based on historical trends - that in 20 years, Aramco will have over 900 billion barrels of total reserves, and future technology will allow for 70 percent recovery.

Al-Husseini disagrees with this analysis, as he believes that Aramco's reserves are overstated by as much as 300 billion bbls of "speculative resources." He instead focuses on original proven reserves, oil that has already been produced or which is available for exploitation based on current technology. All parties estimate this amount to be approximately 360 billion bbls. In al-Husseini's view, once 50 percent depletion of original proven reserves has been reached and the 180 billion bbls threshold crossed, a slow but steady output decline will ensue and no amount of effort will be able to stop it. By al-Husseini's calculations, approximately 116 billion barrels of oil have been produced by Saudi Arabia, meaning only 64 billion barrels remain before reaching this crucial point of inflection. At 12 million b/d production, this inflection point will arrive in 14 years. Thus, while Aramco will likely be able to surpass 12 million b/d in the next decade, soon after reaching that threshold the company will have to expend maximum effort to simply fend off impending output declines. Al-Husseini believes that what will result is a plateau in total output that will last approximately 15 years, followed by decreasing output.

Al-Husseini elaborated that oil field depletion rates also play a significant role in determining the Aramco – and global - production timeline. Increasing output is not simply a function of adding new capacity to already existing operations. Instead, due to depletion rates, new reserves must be brought online to both replace depleted production and satisfy growth in consumption. The International Energy Agency (IEA) has estimated global depletion rates at 4 percent, while a 2006 Aramco statement has estimated Saudi Arabia's overall depletion rate at 2 percent. Al-Husseini estimates that moving forward, satisfying increases in global demand will require bringing online annually at least 6 million b/d of worldwide output, 2 million to satisfy increased demand and 4 million to compensate for declining production in existing fields...

...Considering the rapidly growing global demand for energy - led by China, India and internal growth in oil-exporting countries - and in light of the above mentioned constraints on expanding current capacity, al-Husseini believes that the recent oil price increases are not market distortions but instead reflect the underlying reality that demand has met supply (global energy supply having remained relatively stagnant over the past years at approximately 85 million barrels/day). He estimates that the current floor price of oil, removing all geopolitical instability and financial speculation, is approximately 70 - 75 USD/barrel. Due to the longer-term constraints on expanding global output, al-Husseini judges that demand will continue to outpace supply and that for every million b/d shortfall that exists between demand and supply, the floor price of oil will increase 12 USD. Al-Husseini added that new oil discoveries are insufficient relative to the decline of the super-fields, such as Ghawar, that have long been the lynchpin of the global market.

While al-Husseini believes that Saudi officials overstate capabilities in the interest of spurring foreign investment, he is also critical of international expectations. He stated that the IEA's expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of over 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this "inconvenient truth." Al-Husseini was clear to add that he does not view himself as part of the "peak oil camp," and does not agree with analysts such as Matthew Simmons. He considers himself optimistic about the future of energy, but pragmatic with regards to what resources are available and what level of production is possible. While he fundamentally contradicts the Aramco company line, al-Husseini is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered.” (my bold)

As a geoscientist, this is probably the most interesting Department of State cable that I have seen to date.  If Dr. al-Husseini is indeed correct and his impressions are accurate, this information will ultimately have a massive impact on the world’s oil markets.

Perhaps BP’s Statistical Review of World Energy has shown us this graphically for several years.  Here’s a graph showing basically flat production from the Middle East over the past 10 years and, by the way, Saudi Arabia's oil production peaked at 11.114 million BOPD in 2005 and was 9.7 million BOPD in 2009:

Here are a set of graphs showing that the Middle East’s portion of the world’s proven oil reserves have not risen (and, in fact have dropped by 8 percent) over the past 20 years:

As the world’s historical swing producer, Saudi Arabia has always been there for consumers around the world when more oil is needed and their actions have lulled many of the world’s leaders into a false sense of security when it comes to their supply of energy.  Perhaps Saudi Arabia has come to our rescue for the last time.

Have we passed the point of Peak Oil?

In commemoration of OPEC's 50th anniversary and the fact that, in recent days, I've read articles in the mainstream media like this one printed in Macleans that do their best to debunk the idea that the issue of peak oil is still an issue that faces us, I thought I'd take a look at the world's oil production and consumption situation. I'm concerned that media reports that dismiss the concept of peak oil paint a picture that hurts the cause of conservation of what is so obviously a finite resource.

To give you some background, I am a geoscientist with nearly three decades of experience in the oil industry.

Let's take a look at the supply side of things first. Here's a chart from the BP Statistical Review of World Energy published in June 2010. As background, despite BP's recent Gulf of Mexico debacle, their annual Statistical Review is considered by many in the industry to be the standard world energy reference. This chart shows world daily oil production for the past 25 years.

Notice anything? That's right, since 2004, the world's daily oil production has hovered between 78 and 81 million barrels of oil per day (BOPD). In fact, it really hasn't grown much since 1998 when it hit 74 million BOPD. Now I realize that some of you will say that production has remained static because OPEC restricts production. That is quite possible, although, I question just how much capacity OPEC has to increase production especially in light of the advanced age of producing fields in Saudi Arabia, OPEC's main "swing producer". Since Saudi Aramco keeps reserve and production statistics secret for the most part, the ultimate ability of Saudi Arabia to produce all the oil that the world will need is a great unknown. I think that the statistics shown on this chart are significant when it comes to a discussion on peak oil but I do agree that OPEC's ability to affect daily oil production muddies the waters.

Here's an even more interesting chart from the report. It shows the total reserves-to-production (R/P) ratio in years. As the ratio goes up, reserves of oil increase faster than production on an annual basis. Once again, we have to trust that oil reserve numbers supplied by some OPEC producing countries are accurate especially in light of the fact that their quota depends on the size of their reserves. As the text at the bottom of the chart shows, if no more wells were to be drilled, the world's oil reserves (reserve life index) would last for 45. 7 years. Notice again that since the late 1980s that the R/P ratio or reserve life index has had its ups and downs but again, despite massive drilling efforts, it is stuck between 40 and 45 years. Despite drilling thousands of wells around the world in hostile environments and despite the use of technological advances that have allowed companies to increase reservoir recovery factors, the reserves-to-production ratio has not grown meaningfully.

Examination of the reserve-to-production chart tells me that, at the very least, we have reached peak cheap oil. When companies like Petrobras are drilling in water that is nearly 3000 metres deep, they are doing it because it remains the best place to find significant oil reserves. If "elephants" (huge oil reserves) were present in drilling environments that were less hostile and countries that had stable political regimes, believe me, oil companies would rather spend less to find more with minimal political risk that the reserves they discover could be nationalized. Spending hundreds of millions of dollars on high risk ventures is simply not as economic as drilling for reservoirs containing the same amount of oil in "easy to get at" locations. It's simply that the easy-to-find oil, the close-to-the-surface, the low risk oil and the low sulphur, high gravity oil has already been found.

Now let's take a look at demand. Total world oil demand, according to the BP report, has grown from 75.6 million BOPD in 1999 to 85.2 million BOPD in 2008 and then dropped 1.7% to 84.1 million BOPD in 2009, most likely due to the economic slowdown. Here's the chart showing the data:

Look at the orange coloured area on the chart. Notice how it becomes much wider as we approach 2009. That colour represents the Asia Pacific region of the world. BP includes countries like India, China, South Korea and Japan in the Asia Pacific region. Out of that list, the countries that we need to examine further are both China and India.

In August, it was announced by the International Energy Agency that China's total energy needs had surpassed those of the United States. As I posted at the time, over the past 10 years, China's oil consumption has risen from 4.477 million BOPD to 8.625 million BOPD, a 93 percent increase. India's consumption has risen from 2.134 million BOPD to 3.183 million BOPD, a 49% increase. Over that same time frame, oil consumption in the United States has ranged from 19.5 million BOPD to 20.8 million BOPD remaining essentially flat. What we have to keep in mind, however, is per capita oil consumption.

Here's a summary chart showing per capita oil:

Country Population Daily Oil Used Per Capita Annual

(million) (million bbls) Oil Used (BOPY)

India 1,178.9 3.183 0.985

China 1,338.6 8.625 2.352

U.S. 307 18.686 22.22

It is immediately apparent that both India and China, which make up over one third of the world's population but consume only 63 percent of the oil consumed on a daily basis by the United States, will have a huge impact on future oil demand and, by extension, future oil prices. Should China's total per capita oil consumption reach the level of the United States, they will require basically all of the world's current oil production. While it is highly unlikely that China's per capita oil consumption will reach that level, even if it reaches half of the current U.S. level, they will require 40.7 million BOPD. In addition, should India reach just the per capita level of oil consumption of China, they will require 7.6 million BOPD, an increase of 4.4 million BOPD. It is frightening to think that even small increases in oil demand by both China and India could put a severe strain on world oil supplies.

While some analysts feel that the drop in the price of oil from $147 per barrel in 2008 to the $70 to $80 range today reflects some sort of long term glut of oil supply, I would argue otherwise. The price of crude oil futures on the New York Mercantile Exchange and the Intercontinental Exchange reflect the long term supply of crude no more than the level of the Dow Jones reflects the health of the American economy. In the same vein, the weekly crude inventory numbers have an influence on crude prices that is far beyond the impact that it should have. Just ask the millions of unemployed Americans how well the Dow reflects their well-being and you'll get an idea of how much oil prices today reflect the actual long term supply situation.

In summary, while we may not have reached peak oil, we certainly have reached peak cheap oil. My instincts tell me that we have reached peak oil and that the world is going to be an entirely different place for the coming generations. Quite honestly, I think that we should err on the side of caution when discussing an issue like peak oil when it is so obvious that a continued supply of oil is pivotal to the world's economy. Either that, or we have to start making changes in our lifestyles now.

If you are interested in more information on the study of Peak Oil, please go to the Association for the Study of Peak Oil and Gas.