[NYTr] Oil Officials See Limit Looming on Production

[All the News That Doesn't Fit]

sent by Kelly Pierce

The Wall Street Journal - Nov 19, 2007
http://www.wsj.com

Oil Officials See Limit Looming on Production

By RUSSELL GOLD and ANN DAVIS

        A growing number of oil-industry chieftains are endorsing an
idea long deemed fringe: The world is approaching a practical limit to
the number of barrels of crude oil that can be pumped every day.

        Some predict that, despite the world's fast-growing thirst for
oil, producers could hit that ceiling as soon as 2012. This rough limit
-- which two senior industry officials recently pegged at about 100
million barrels a day -- is well short of global demand projections over
the next few decades. Current production is about 85 million barrels a
day.

        The world certainly won't run out of oil any time soon. And
plenty of energy experts expect sky-high prices to hasten the
development of alternative fuels and improve energy efficiency. But
evidence is mounting that crude-oil production may plateau before those
innovations arrive on a large scale. That could set the stage for a
period marked by energy shortages, high prices and bare-knuckled
competition for fuel.

        The current debate represents a significant twist on an older,
often-derided notion known as the peak-oil theory. Traditional peak-oil
theorists, many of whom are industry outsiders or retired geologists,
have argued that global oil production will soon peak and enter an
irreversible decline because nearly half the available oil in the world
has been pumped. They've been proved wrong so often that their theory
has become debased.

        The new adherents -- who range from senior Western oil-company
executives to current and former officials of the major world exporting
countries -- don't believe the global oil tank is at the half-empty
point. But they share the belief that a global production ceiling is
coming for other reasons: restricted access to oil fields, spiraling
costs and increasingly complex oil-field geology. This will create a
global production plateau, not a peak, they contend, with oil output
remaining relatively constant rather than rising or falling.

        The emergence of a production ceiling would mark a monumental
shift in the energy world. Oil production has averaged a 2.3% annual
growth rate since 1965, according to statistics compiled by British oil
giant BP PLC. This expanding pool of oil, most of it priced cheaply by
today's standards, fueled the post-World War II global economic
expansion.

        On Oct. 31, Christophe de Margerie, the chief executive of
French oil company Total SA, jolted attendees at a London conference by
openly labeling production forecasts of the International Energy Agency,
the sober-minded energy watchdog for industrialized nations, as
unrealistic. The IEA projects production will grow to between 102.3
million and 120 million barrels a day by 2030. Mr. de Margerie said
production by 2030 of even 100 million barrels a day will be
"difficult."

        Speaking Clearly

        This is "the view of those who like to speak clearly, honestly,
and [are] not just trying to please people," he bluntly declared. The
French executive said many existing oil fields are being depleted at
rates that will damage their geologic structures, which will limit
future output more than most people allow. What's more, some nations
endowed with large untapped pools of oil are generating so much revenue
from their current production that they feel they don't need to further
develop their fields, thus putting another cap on output.

        Earlier this month, James Mulva, the chief executive of
ConocoPhillips, echoed those conclusions in a speech at a Wall Street
conference: "I don't think we are going to see the supply going over 100
million barrels a day.... Where is all that going to come from?" He
questioned whether the industry has enough support services and people
to execute projects to add that much oil production.

        Even some officials from member states of the Organization of
Petroleum Exporting Countries, which has long insisted on its ability to
supply the world with fuel for decades hence, are breaking ranks and
forecasting limits. The chairman of Libya National Oil Corp. said at the
same London conference the world will have difficulty producing more
than 100 million barrels a day.

        A former head of exploration and production at Saudi Arabia's
national oil company, Sadad Ibrahim Al Husseini, has also gone public
with doubts. He said in London last month that he didn't believe there
were enough engineers or equipment to ramp up production fast enough to
keep up with the thirsty global economy. What's more, he said, new
discoveries are tending to be smaller and more complex to develop.

        Many leaders of the industry still dismiss the idea that there
is reason to worry. "I am no subscriber to the theory that oil supplies
have already peaked," said BP's chief executive, Tony Hayward, earlier
this month in a speech in Houston.

        Exxon Mobil Corp. Chief Executive Rex Tillerson has said that if
companies had better access to the world's oil reserves, production
would increase and prices would go down. "Sufficient hydrocarbon
resources exist to play their role in meeting this growing global
demand, if industry is allowed to access them," he said in a speech this
month. If access were granted, Exxon Mobil believes the industry would
be able to raise fuel production to meet demand in 2030 of 116 million
barrels a day.

        The oil industry has long been beset by doom-and-gloom
scenarios, which so far haven't panned out. "The entire oil industry in
the late 1970s was convinced the price [of oil] would be $100 by 1990
and we would need huge oil shale mines" to exploit oil locked away
tightly in rock, says Michael C. Lynch, president of Strategic Energy &
Economic Research Inc. Of course, that didn't happen, as discoveries
ushered in new eras of low-priced oil in the mid-1980s through the late
1990s.

        U.S. government experts are optimistic -- to a point. The Energy
Information Administration, the data arm of the Energy Department,
forecasts world oil production will hit 118 million barrels a day by
2030. But the agency warns that its prediction might not pan out if
resource-rich nations such as Venezuela and Iraq don't invest enough in
their operations.

        "We know that the world is not running out of energy resources,
but nonetheless, above-ground risks like resource nationalism, limited
access and infrastructure constraints may make it feel like peak oil
just the same, by limiting production to something far less than what is
required," said Clay Sell, deputy secretary of energy, in a speech in
October. Resource nationalism refers to tightening state control of oil
fields to achieve political aims, often by restricting outsiders'
ability to develop the oil for world markets.

        'Undulating Plateau'

        Two or three years ago, it was far more common for oil analysts
and officials to trumpet the potential of new technology to harvest more
oil. In a report last year, Cambridge Energy Research Associates, a
prominent adviser to energy companies, made the comforting prediction
that oil production could reach 110 million barrels a day by 2015, and
"more than meet any reasonable high growth rate demand scenario we can
envisage" up to that date. Because of progress being made in extracting
oil through new methods, CERA said it found "no evidence" there would be
a peak in oil flows "any time soon." In a later report, CERA said world
oil production won't peak before 2030 and that even when it does,
production will resemble an "undulating plateau" for one or more decades
before declining gradually.

        Oil companies have seen several years of bull-market prices, and
thus of trying to produce more. This has given their executives a better
sense of what is and isn't possible.

        One limit: Many people think most of the world's giant fields
already have been discovered. By 1970, oil-industry explorers had
discovered 10 giants that could each produce more than 600,000 barrels a
day, according to Matt Simmons, chairman of energy investment banking
firm Simmons & Co. International. Exploration in the next 20 years, to
1990, yielded only two. Since 1990, despite billions in new spending,
the industry has found only one field with the potential to top 500,000
barrels a day, Kazakhstan's Kashagan field in the Caspian Sea. And Mr.
Simmons notes it is proving expensive and difficult to extract.

        Big strikes are still possible. This month, Petróleo Brasileiro
SA announced a deep-water find off Brazil's Atlantic coast that appears
to be the largest discovery since Kashagan.

        But some of the most promising geological formations are in
locations that are inhospitable, for reasons of geography or,
especially, politics and strife. Output from Iraq's rich fields is
unlikely to grow much until security improves and outside investment
returns. The future of Iranian and Nigerian production is likewise
clouded by geopolitical and local instability.

        Labor and construction bottlenecks also are making it difficult
to develop proven fields. One of the largest obstacles is the booming
commodity markets themselves: The prices of raw materials used in
oil-field platforms and equipment has escalated. And during the years of
low or moderate oil prices in the 1980s and 1990s, companies didn't
develop enough geologists and other skilled workers to supply today's
needs. "Years of underinvestment in new talent have led to a limited and
aging pool of skilled workers," noted Andrew Gould, the CEO of
oil-service giant Schlumberger Ltd., last month.

        High oil prices have also led to steep cost inflation for
drilling rigs and other equipment. Costs have soared so much that the
industry is falling behind in the investment needed to sate expected
future demand. To meet demand forecasts of 90 million barrels of oil a
day in 2010, the industry needed to have spent $350 billion on drilling
and producing in 2005, argues Larry G. Chorn, chief economist of Platts,
the energy and commodities-information division of McGraw-Hill Cos. But
the International Energy Agency estimates that spending on oil-field
production in 2005 came to only about $225 billion, he says.

        A failure to spend enough in the past few years "may have
already put the industry behind the spending curve," Mr. Chorn says. As
a result, he predicts "temporary shortages over several years, causing
debilitating price spikes."

        Compounding the problem: Most of the world's biggest fields are
aging, and production at them is declining rapidly. So, just to keep
global production at current levels, the industry needs to add new
production of at least four million daily barrels, every year. That need
is roughly five times the daily production of Alaska, with its big
Prudhoe Bay field -- and it doesn't assume any demand growth at all.

        Rate of Decline

        Mr. Simmons scoffs at estimates that production from proven
fields will decline only 4.5% a year. He thinks a more realistic rate of
decline is 8% to 10% a year, especially because modern technology
actually succeeds in depleting fields faster.

        If he's right, the industry needs to add new daily production of
at least eight million barrels -- 10 times current Alaskan production -- 
just to stay even.

        Mr. Simmons thinks the world needs to shift its energy focus
from climate change to more immediate concerns. "Peak oil is likely
already a crisis that we don't know about. At the furthest out, it will
be a crisis in 2008 to 2012. Global warming, if real, will not be a
problem for 50 to 100 years," he says.

        Oil executives who believe a production ceiling is coming are
making plans to stay relevant in a world where oil production is
constrained.

        Mr. de Margerie said at Total's annual meeting this spring that
the company was "looking into" nuclear-industry investments and had
hired nuclear experts to help make strategic decisions. ConocoPhillips
recently said it was considering building a commercial-scale plant to
turn plentiful U.S. coal into natural gas.

        Soaring energy prices have breathed new life into projects
targeting "nonconventional" oil, such as that trapped in sand or shale.
But these sources can't be tapped nearly as quickly or inexpensively as
the big oil finds of the past.

        Vivid Example

        Canada's massive oil-sands deposits, which hold the largest oil
reserves after Saudi Arabia's, offer a vivid example. They contain an
estimated 180 billion barrels of oil. But after years of intensive
development and tens of billions of dollars of investments, the sands
are producing only a little more than 1.1 million barrels of crude a
day. That's projected to reach three million a day by 2015. The oil
deposits are so heavy that companies must either mine them or slowly
steam them underground to get the oil to flow out of the sand.

        Randy Udall, co-founder of the U.S. chapter of the Association
for the Study of Peak Oil and Gas, has written that these unconventional
oil supplies are like having $100 million in the bank, but "being
forbidden to withdraw more than $100,000 per year. You are rich, sort
of."

        As these uncertainties mount, there is growing hope that Saudi
Arabia, which has about 20% of the world's oil reserves, would ride to
the rescue if needed. Saudi Aramco, the national oil company, has
embarked on an ambitious plan to increase its daily production by 30%,
or three million barrels, early next decade, and thus reclaim the title
of top producer from Russia. But Mr. Al Husseini, the former Saudi oil
executive, now an independent consultant, said others aren't doing as
much, leaving the world entirely dependent on Saudi Arabia to provide
extra capacity.

        "Everyone thinks that Saudi Arabia will pull us out of this
mess. Saudi Arabia is doing all it can," he says in an interview. "But
what it is doing, in the long run, won't be enough."