BIKE: Energy crisis update

[Roger Baker]

[This is one of the most accurate and understandable assessments you 
are going to find for WTSHTF, by the editor of the leading British 
petroleum journal. We'll be lucky to make it through 2007 in good 
shape. -- Roger]

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http://www.globalpublicmedia.com/transcripts/379


Heading For Peak: Skrebowski's Oilfield Megaprojects Update

12 April 2005

In Brief: For Global Public Media, Chris Skrebowski, author of the 
important Oilfields Megaprojects Report for the UK Petroleum Review, 
explains to Julian Darley why 2005 will be a critical year for global 
oil.

Chris Skrebowski, Editor of Petroleum Review (UK) interviewed by Julian 
Darley, 11 April 2005  

Julian Darley: Can you explain what a ‘megaproject’ is?

Chris Skrebowski: Yes. The definition of a megaproject that I use is 
any field development which is going to produce in excess of 100,000 
barrels a day. Now the reason I pick that figure is that because on 
normal sizing of projects, this is the equivalent of about 500 million 
barrels [reserves]. Now that is in effect the cut off point where a 
project will make a useful difference to a company's or a country's 
production. Once you get much below that you're into quite small 
projects. There are large numbers of them and they're difficult to 
tabulate and they make rather less impact on the whole.

JD: So what is your Oilfields Megaprojects Report?

CS: What I've done is I've simply tabulated all the known, that is to 
say publicised, projects that we know about in the world. Now these 
days the companies aren't reticent, they don't keep projects secret. 
They're keen to tell the world and tell their shareholders what new 
production they've got coming up. So we have fair confidence that if 
we've got the listing right we've got most of these. In addition there 
is a tendency to publicise fairly quickly any large discovery that's 
been made. So in addition to tabulating projects that have gone into 
projects that we have dates for, I have a listing of large discoveries 
which are likely to become projects perhaps with a bit more work and 
then we'll get the full description of the dates to go with them.

JD: Can you explain the significance of your report, in other words, 
why you do it.

CS: The reason I do it is because this tells us fairly clearly how 
future production flows are going to work. The reason it's able to do 
this is that the oil industry actually is a quite slow moving industry. 
These projects have very long lead times. For example a typical large 
offshore project is taking at least five years from when you first hear 
about it to when it produces its first oil.

Even large onshore projects take 3 to 4 years from when you hear of it 
to when it's in production. And the faster project you can have on this 
side is maybe the reworking of a large oil field in maybe Saudi Arabia, 
but even then you're talking about two and a half years so you don't 
really have surprises, nothing really creeps up on you. So if you 
continuously update this you get a really good idea of the flow of 
future oil.

JD: This side of 2010 we can't really have any miracle new production 
coming on board that you don't really know about?

CS: Not of a magnitude that would really alter the outcome. That's to 
say yes, people can scrabble around, they can put little extra wells 
here and there. There may be some small projects they can conduct, but 
it really won't make a significant difference to the outcome. So in 
that sense the dye is pretty well cast, out certainly to 2010 and maybe 
beyond that.

JD: Now the matter of depletion is not really that easy to understand. 
I mean in principle it's easy to understand, but in practice as so many 
things, it's not so easy. Can you explain a bit more about depletion 
especially as its happening now in the world. For instance the fact 
that Exxon and the International Energy Agency have suggested 5% 
depletion which would be around 4 million barrels per day reduction, 
and yet in your editorial for Petroleum Review (April 2005) recently 
you said we only need to make up for one million barrels a day. Can you 
explain the discrepancy?

CS: Yes, hopefully this is reasonably straight forward. All oil fields 
deplete, literally from the day they start. So you know, very quickly 
if you've got a field there will be some wells which are not producing 
as much as they were say last year. And you'll be drilling new ones to 
compensate or some of the existing ones will be able to be turned up 
and they will compensate. Now that's a completely normal process and no 
one thinks very much about it.

To give a very homely analogy, if you go do down to your local pub and 
you order a pint of beer, and you find that they're drawing it from a 
different beer engine from last time you were in, it's really of not 
much interest to you. You're still getting your beer. They for some 
reason have changed the tap around, connected the kegs differently. So 
that's the sort of every day depletion. Now there then comes a point 
when perhaps it's not any longer a depletion within a field, but some 
parts of a country are actually in decline, but they are still being 
offset by increasing production from another part of the country. 
Canada's quite a good example of this. The conventional production in 
western Canada is in decline at the moment. Over recent years of shore 
production in eastern Canada has gone up. Production from heavy oil and 
from tar sands has gone up. So, if you are a buyer of Canadian crude 
you wouldn't be that bothered. You're not getting it from quite where 
you were before but that doesn't bother you.

So, if we go back to the pub analogy, if you go down to your local pub, 
this would be the equivalent of being told “well we're not serving that 
beer in this bar but if you go to the upstairs bar you can get it 
there.” So it would mildly inconvenience you and no more. Now this, if 
you like, has been a key part of the oil industry since its inception.

But, then there's the third type of depletion and that's the type that 
worries us. That's when an entire country – because we define our 
measurements on the basis of countries – starts to decline. And this 
becomes different because now the customers for that oil now have to go 
off and find a new supplier. So for example the UK North Sea is going 
down at about 150,000 barrels a day, 200,000 barrels a day. Now the 
people that were buying that oil now have to go off and find another 
supplier. For that other supplier, they are like new demand, new 
customers.

So again if we go back to the slightly forced analogy of the pub: 
You've gone down to the pub, you've asked for your pint of beer. 
They've reluctantly admitted that they haven't got it. You're now going 
to go off and find an other pub and see if they've got some. Now that, 
if you think about it is a completely different situation than if 
you've just got to the upstairs bar or taking it from a different beer 
engine.

So to put the numbers on it, the overall decline which is largely being 
covered for by normal oil industry activity is around 4 million barrels 
a day per year. The specific decline which has got to be made up from 
somewhere else is around one million barrels a day per year. That's the 
number which is recorded in the editorial.

JD: And that is the one million barrels a day per day which must be 
made up by genuine new fields, not just infilling, and working the old 
fields over to get more out of them?

CS: Yes, that's right. This number is now on the rise. It's on the rise 
because more countries are moving from being able to expand production 
to production actually declining. We know that over the last three 
years the numbers in decline have been fairly steady. One or two have 
been added. Yemen went over the edge last year. And so it's been 
holding it around that one mb/d mark. But in the next couple of years 
we expect some very big countries, very big producers to move into 
decline. We expect China to go. We expect Mexico to go. We expect India 
to go a little later. We expect Malaysia a little earlier. Denmark 
probably this year. Brunei probably the year after. So then suddenly 
that one mb/d is going to crank up, maybe to 1.3, maybe to 1.4, maybe 
even more than that.

And so you're getting a sort of tipping effect. It's like a scales.

JD: And there is one further extremely important factor, is there not, 
and that is the matter of demand growth, which has become such an 
important factor. So is it correct to say that what new fields have to 
make up for is the roughly one million barrels a day per year decline 
that we've talked about, but also this demand growth. Can you say how 
much the demand growth is expected to be, or indeed has been, and how 
that adds up.

CS: Well two observations, the first observation is that the playing 
field isn't level, it's on a slope. So we've got to produce a million 
barrels a day that we didn't expect to just to stand still. That's 
before we meet any new demand.

Now the new demand , and it's difficult to disentangle how much of that 
is this one mb/d and how much is genuine new demand in the sense we 
normally recognise it, ran last year at around 2mb/d. Which was about 
the fourth highest increase on record. Now initially people were 
surprised by this. We had the strange phenomena where we had the IEA 
revise their demand estimates up. And we've been repeating the same 
process this year. So we're already up to an estimate of 1.8 mb/d for 
this year. But no one's very confident it will stop there. They think 
it will probably go on up. No one's quite sure how far it will go up. 
Possibly not quite as high as last year, but then again possibly as 
high.

So that adds up to somewhere between two and three million barrels a 
day extra if you add the one million together with the 1.8, 1.9 or even 
more?

Well I think we should assume that the one was included in the final 
outcome of 2.7 that we saw last year. In fact the early estimates I 
expect were simply because they didn't include that number.

Again it's difficult to disentangle, because everyone has a slightly 
different way of dealing with depletion. Some total it up, some net it 
off on each country. It gets... Conceptually it's quite simple, in 
practical terms it's quite complicated how you treat it.

JD: Can you then tie together and say what does that mean for this 
year, thinking about the amount of depletion, the amount of demand, and 
the amount of new supply that can come on to meet that?

CS: Yes I can. My best estimate for new supply for new supply in 2005 
is around a million b/d of OPEC production and maybe 1.5 mb/d of 
non-OPEC production if everything worked perfectly. But already the 
countries are saying that they think it will be a lot closer to one. So 
that would give us potentially two mb/d of new capacity. Now the EIA is 
already estimating demand growth at 2.2. The IEA is still estimating it 
at 1.8 but I suspect will revise it in this next month's report. So 
we're already looking as though it's barely going to cover our 
immediate requirements. The immediate conclusion is that the price is 
going to stay high. The situation's going to remain tight.

And we'll bet testing if that little bit of spare capacity in Saudi 
Arabia is really there or not.

JD: Spare capacity is important because it mollifies, quietens down 
prices. And when it gets very small, prices become very volatile. How 
much space capacity do you think is really left in the world now?

CS: We are told that there is about 1.5, 1.8in Saudi Arabia. That is 
probably true. The question is how much of that is in any sense usable, 
given that some of this is rather high sulfur crude which we've no 
refinery capacity to cope with. So I think the short answer is, not 
very much. Which is an unsatisfactory answer, but probably the best 
answer you'll get.

JD: Yet OPEC is debating whether to debate whether to raise its output 
quota by another half million b/d to 28mb/d in the near future. Do you 
think it can actually deliver? What does that all mean?

CS: As you're hinting, it's not at all clear what it means. I mean OPEC 
as an organisation can only function if it does have spare capacity. 
Once you have no spare capacity you have no particular lever except the 
rather dramatic lever of simply turning it off, and watching the prices 
spike. So OPEC's power depends on having spare capacity and using that 
to move prices in a range that they want. Now clearly OPEC has largely 
lost control of price which implies they really don't have much usable 
spare capacity to work with.

I think we're into the sort of politics of this and talking up the idea 
that they have slightly more leverage than they actually do.

JD: Which presumably at a certain point will be bitten by reality?

CS: It's in no one's interest to demonstrate this too clearly. Which 
sounds an overly cynical remark. You see if we really thought there was 
no spare capacity and there was nothing we could do then I suspect we'd 
all start to get a bit panicky. It therefore seems quite important to 
either maintain the believe or the reality that there is a little bit 
of slack in the system.

JD: In your list of fields coming on in the next five to seven years, 
many of which as you've said are in the 100,000 b/d category, which 
would have been by previous world standards quite small. But there are 
a couple of very large ones due to come on before 2010, though not 
many, and the largest of those due on in the next five years is the 
Saudi Arabian field of Khurais. Now this has been described in less 
than kind terms by analysts such as Matt Simmons. Do you really think 
that Khurais can deliver 1.2 mb/d by 2009 as is suggested?

CS: I think on these occasions, it's probably wise to suspend 
disbelief. If the Saudis are telling us it can produce this and are 
prepared to invest on this basis, then the answer is yes, it probably 
can do this. The question is, can it do this for any length of time? 
The problem with many Saudi fields is that they are basically carbonate 
reefs which don't necessarily give up their oil very easily. There's a 
certain amount of oil which moves into to the fissures and fractures. 
And that can be produced at quite high rates. But then once you've 
cleared that out, the rate of movement out of the main body of 
carbonate is really quite slow. So I think the key question with a lot 
of the less productive Saudi fields is not whether they can achieve the 
numbers the Saudis claim but whether they can maintain that for any 
length of time.

JD: And is it not also true that certain fields that have been 
suggested as new fields, by the Saudis for instance, are not really 
very new? Can you say something about Khurais again as an example? It's 
not really a new field is it?

CS: No, it was discovered in 1957. As far as we can tell it was put 
into production in 1964. It produced at no very dramatic rates until 
the mid-80s, and appears to have been turned off when prices went weak 
and the Saudis turned a lot of their peripheral fields out, to 
concentrate a lot of their man power on a limited amount of their more 
productive fields.

JD: And that not very impressive production was about 150,000 barrels a 
day, is that right?

CS: That's a figure I've heard, yes.

JD: Which is nowhere near the 1.2 million barrels a day which is being 
projected.

CS: No. By the sound of things we're talking about a total rework of 
this field. This field has large multi-billion barrel reserves in it. 
The question, as I said earlier, is to make these barrels flow in a 
productive manner. Now presumably they will be using further 
applications of these large, maximum reservoirs contact wells. They'll 
presumably be going in for some kind of heavy fracturing program too, 
to try to open up the reservoir and make it flow better. And we're 
talking about quite an extended time-frame for a known field to be 
reworked. We're talking about nearly 4 years before it achieves this 
flow rate, so obviously they have plans to do a great deal of work on 
it.

JD: That's a projection for 2009. Are there any projections for this 
year, 2005 and 2006, which you think will be on the optimistic side 
which you think will slip and not reach their targets?

CS: I can't sort of point to any specific project, and say I think that 
will slip, apart from the point that would be slightly invidious. What 
I can say is that the experience of recent years is of considerable 
slippage. Areas that have seen particularly bad project slippage have 
been places like Nigeria where we have seen very extended time frames 
between the discovery of a field and its likely first production date. 
Some of these are now slipping out to 8 even 9 years. Which you know, 
is way beyond the average of the megaprojects which is just shy of 6 
years. Which if we've seen anything in a consistent movement, it's the 
smearing out of the project profile. And if we're now starting to say 
that the project profile may be short of our immediate requirements, 
smearing it out further – well, we'll last longer but we still are 
missing all the time, if you see what I mean.

And an alternative analysis which is being used by the CIBC (Canadian 
Imperial Bank of Commerce) is to look at the potential shortfall and 
what price you'd need to close that shortfall by destroying demand. And 
the figures that they're coming up with are quite dramatic. They see 
this sort of shortfall increasing from about one mb/d in 2006 which 
they believe can be closed by the price rising to $61/b, and then they 
take it up to 2.8 mb/d the year after at $70 oil. 2008 they've got 
shortfall of 5 million barrels and $80 oil. 2009 they're up to $90 oil. 
2010 they're up to $101 oil.

Now this is a rather economist's approach because it assumes that 
everything works smoothly. I'm not sure that high oil prices can be 
accommodated in that sense. It seems much more likely that they will 
induce some significant economic set back.

JD: Such as economic recession or even depression?

CS: Hard to see what else they could do. I mean, you know, given that a 
very high proportion of oil use is in areas where it's not very easy to 
substitute. If you are forced not to do that, then that will have a 
huge impact on economic activity. I mean, if you lose your job 
obviously you don't spend so much fuel to get to work, because you're 
not going to work. But that's a rather dramatic way to cut back 
gasoline usage.

JD: That's what is sometimes called demand destruction.

CS: Well that's what they're talking about. Only they are assuming I 
think that this is a smooth and controllable process. What I'm just 
asking is, can we be that confident?

JD: In the light of much evidence, and in the light of your report, do 
you think that Ken Deffeyes’ suggestion of Thanksgiving 2005 being the 
time of peak, is too bold in your opinion?

CS: No, that is entirely possible. We're now into, you know, a sort of 
unknown land. We haven't been in this situation before. I don't think 
we know quite how to analyse it. We're taking traditional, fairly 
conventional analysis. And we're saying let's see what happens when we 
do this. And I suppose the rough answer we get is that from this year 
on it looks difficult to get it to add up comfortably. It certainly 
looks as though after about 2008 it really doesn't add up. But it's not 
quite clear what more you can say.

JD: With that, thank you very much indeed.