Monday, October 12, 2009

Why Oil Is Much More Plentiful Than "Peak Oil" Advocates Claim

"Peak oil" advocates would like you to believe that we are running out of oil, but Matthew Badiali explains at Daily Wealth why extractable oil is much more plentiful than they claim. If his argument is correct, it could mean strong profits for those who can take advantage of this window of opportunity in oil. See the following post to learn more.

Mexico's colossal Cantarell field was once the second-largest oilfield in the world...

Cantarell funds 40% of Mexico's annual budget. Those petro-dollars paid for universities, built a $12 million sports stadium in Chihuahua, erected a giant flagpole in Nuevo Leon, remodeled churches in Yucatan, and constructed swanky government offices in Oaxaca.

But according to a recent Wall Street Journal article, oil production from Cantarell peaked in 2005 and has fallen 75% since then. The golden goose is a dead duck... and its decline cost the government $14 billion this year.

The same thing is happening in Indonesia, Iran, and Venezuela. Indonesia went from a proud member of OPEC to a net oil importer. Venezuelan production peaked in 1997 and is down 27% since then. Iran's production peaked in 2005, but has only fallen 2% so far... The worst is yet to come there.

A lot of factors contributed to the undoing of these great oilfields – bureaucratic mismanagement and socialist daydreaming are key culprits – but behind it all is a simple, unavoidable fact of geo-engineering. That fact is going to make a few energy investors rich... Here's why:

Oil recovery comes in three stages: primary, secondary, and tertiary. The early part of oil production flows under the natural pressure of the field – the iconic gusher of the oil industry. Oil escapes into the well, where it can be pumped to the surface. That's easy work. But primary production will only get about 10% of the oil in the field to the surface.

Eventually, production exhausts the field's natural pressure. Then the engineers begin to replace the natural pressure by pumping water or natural gas into the field. That allows the companies to recover 20% to 40% of the oil left in the field. But it also means 60% to 80% of that oil remains trapped underground in so-called "depleted" fields.

Tertiary recovery, or enhanced oil recovery (EOR), employs more sophisticated techniques to recover another 25% of the original oil in place. That means companies can recover 50% to 100% as much oil as the field originally produced.

When you consider the U.S. has pumped 75 billion barrels of oil since 1977... that means, conservatively, we could recover another 35 billion barrels of oil from known fields.

A lot of the big oil companies scrapped their EOR plans in the '80s, when the price of a barrel of oil wallowed in the teens. Now that oil is back up around $70, EOR is viable again... and it represents a huge "new" source of oil.

EOR companies in the U.S. spend between $20 and $25 per barrel to produce light, sweet crude oil. That's in line with the industry's average cost to find and develop each barrel of oil. And it's well below the cost of developing fields offshore or in tar-sand deposits.

Right now is a terrific time to buy these kinds of oil plays. On average, the market values oil companies at about $14 per barrel of reserves. But you can buy EOR companies for half that – about $7 per barrel of reserves.

You see, most oil companies are valued on their "proven" reserves, meaning these oil holdings have been scrutinized and can be "economically and legally produced under existing economic and operating conditions." That's the SEC's standard: that the reserves can be produced today.

But by definition, most of the oil reserves held by EOR firms can't be produced today... That's why these companies are using unconventional techniques. EOR companies have to describe them to investors as "probable" reserves. And the market doesn't pay for "probable" – certainly not nearly as much as it does for proven.

The market distinction between proven and probable reserves suggests probable reserves are more risky, that maybe there isn't as much oil as the company says. But the fact is, this isn't speculative drilling in virgin territory. Domestic EOR companies are working in 100-year-old oilfields that have been measured, assessed, assayed, developed, and produced over and over. Everyone knows the oil is there.

As soon as the rigs start pumping out petroleum, the SEC's bureaucrats can no longer ignore those reserves. The EOR companies can shift them to the "proven" category, and the market will respond by bidding up the value of those barrels.

Oilfield reclamation technology is actually the future of the entire U.S. oil industry. It's safe, inexpensive, and will get cheaper over time. According to a 2006 study for the Department of Energy, the U.S. has about 210 billion barrels of oil that it can recover using EOR techniques. That's nearly 10 times today's proven reserves.

This article has been republished from Steve Sjuggerud's blog, Daily Wealth.


jagged ben said...

This blog post begins with the usual straw-man argument against peak oil: that peak oilers believe we are "running out of oil." What "peak oilers" actually say is that oil production will peak sooner and not later. (Everyone agrees that oil production will peak at some point, and everyone agrees that we will eventually run out of oil.) And nothing in this post challenges anything "peak oilers" say. Tertiary production is by definition more expensive and slower than primary or secondary production, so if most of the worlds oil fields are entering tertiary production, overall global production will decline. (Reserve definitions have essentially nothing to do with it.) You can't beat laws of thermodynamics with technology. When the peak will come, and whether the decline will be slow or quick, are the only things to be debated. (This post offers no evidence related to when the peak will come.)

JM said...

Have to second the first comment. Peak Oilers are not saying we are about to run out. They are saying that global production rate has peaked, because it as, and no forseable future scenario can change that.

Saildog said...

The article is garbage. Peak Oil is a about production, not about reserves. Oil will never run out but neither will production carry on growing for ever. It is highly likely peak oil has already happened in the 2004-2008 period.

The real question is what happens now? Is our economy so dependent on oil that it is effectively limited to the amount of oil that can be produced? I personally doubt this will induce a rapid collapse. A permanent grinding recession is much more likely, mitigated only to the extent we can use oil more efficiently.

This means a lot of things, but especially it means the end of growth, including human population growth. The quicker we get to grips with this new paradigm, the better off we will be. I suspect that our economic/financial/political elites do not understand this; and are desperate to return to growth.

So conditions will get steadily worse - fewer jobs, more foreclosures, more bankruptcies, more wars, more chaos. Out of that misery leaders will emerge, most likely leaders that are despots. Only if we are really lucky will we get enough good leaders to guide us into a local, sustainable and low carbon life.

Anonymous said...

We are not running out of oil. We are nearing peak rate of production. More drivel on oil, as if we hadn't had enough.

Anonymous said...

finite planet
finite resources
finite ( and declining) carrying capacity

ie human population must peak and then decline

the only question is will we crash or are we smart enough to engineer a controlled decline?

Mr. Moai said...

I don't see how exactly you have shown that oil is more plentiful than peak oilers claim. The premise of peak oil is that all fields will collapse and go into decline as you have shown. We have found and exploited the reserves that are easily tapped and they have started to decline. We are using the methods you mentioned for the recovery stages, no peak oilers claim differently. Tertiary recovery does increase the total extractable reserves, but this has not gone unaccounted for either. In fact the 25% number you used for EOR seems exceedingly high considering that the book "Enhanced Oil Recovery" published by the Society of Petroleum Engineers puts it at 5-15%. I understand that there is a political component to this and there will be in the future, but are the politically unstable regions with oil likely to become more stable as it becomes more valuable? I think not. I would suggest you do a bit more research before posting on this topic again.

tahoevalleylines said...

Peak Oil is an example of the mathematical phenomenon of natural resource extraction, not a theory or a belief system...

Jagged ben is right on. California mother lode towns like Placerville, Colfax and Grass Valley are sitting on unknown, but certain substantial quantities of gold ore and actual metal. It might as well be on the moon. Oil likewise; most oil cannot be gotten out, and what can, will occur over time span too long to keep price down.

In fact, a case can be made that oil is now too precious a commodity to simply burn up in private vehicles. We are not quite at the point of preserving oil for petrochemicals and strictly strategic use:

Manufacturing, agriculture, infrastructure construction and maintenance, and critical transport of victuals and necessities of life. Necessary travel and commuting as opposed to leisure and impulse trips. We are in the wrong disposition when we strive to maintain oil flow simply for the sake of profit and/or convenience, and with aim of perpetuating a private vehicle for everyone at puberty.

Investors, by all means put your money into oil extraction. You will have good collateral, but beware of possible Emergency Federal Executive Order for Gasoline & Diesel motor fuel rationing. Expect longer term realization than heretofore. Investing in the economics of the Oil Interregnum is better stewardship, and so, a better business practice.

The book "ELECTRIC WATER" by Christopher C. Swan (new Society Press, 2007) offers investors some ideas that make for a more sustainable line of national policy. See paper:

This is a heads up for investors thinking they can expect a business as usual environment centered around the pump more oil & continue happy-motoring syndrome. That ended on 911DAY, the surge of oil price thru late 2007 to summer 2008 was the glaring light on the screen. We are on the Peaking plateau of oil, do not expect production to ever appreciably exceed July 2008 levels.

If by drastically increasing automobile fuel economy, the number of cars can continue to grow. The rub here is the propensity to drive more miles as the mileage increases, creating a net increase of consumption. Another difficult thing is the requirement for energy to build cars, and limits on the special materials required for fuel sipping autos. Batteries take energy to manufacture, and only some of the materials used can be reclaimed economically, with regards to energy used in recycle process.

America cannot support car buying with second mortgages any more, that may be the biggest hindrance of all on the speedy turnover to new generation automobiles. But we have to try, that is human nature. But this is not the same game, the energy rules have changed, and throws all the calculations of making business plans into question. In best case.

China is embarked on the largest railway expansion ($500 Billion+) and line extension ever seen in world history. These are standard gauge, steel wheel systems, not Mag-Lev vanities. Strategic thinking in China, the land of Sun Tzu, is betting on rail mode even as they cherry pick US car lines. Manufacturing capacity and processes, not model names, are what China is after. They are interested in new factories! We go right along...

US must reform the Army/Guard Railroad & Operating Battalions and commence rehab of dormant rail branchlines, beginning with agricultural product corridors. As lines are brought up to de minimus operating condition, Mili5tary Logistics unit moves on to next job; local private operator takes over.

See articles 374 & 1037, in ASPO Newsletters 42, and 89, respectively. Invest wisely.

Robbie Montgomery said...

Great story guys. You only left out one small piece of information. That is, how do they actually reclaim the [stranded] oil?

We all know that the oil is down there, any bone-head could have told us that, and if there is was a quick / easy / cheap way of getting it out, then I think we would have all heard about it by now....

so left i'm right said...

Rather than scheming to make money on the decline of the worlds current lifeblood, why not rather invest you money on building and living a more sustainable life?

Hell, all you richie richs could really do some good for the world instead of "pumping" more money and resources into this finite industry. An industry that wants you to not think about tomorrow. if you instead invested good arable land, the tools (non-fossil fuel) and mostly invest in people that want to build a low energy world? That could be the ultimate long term investment - oh, but wait. All you want is a fast buck today.

Anonymous said...

Quantities of oil, per se, don't matter. Two oil peaks *do* matter.

First is the price peak. When the remaining oil gets very expensive, it might as well not exist. We have some flexibility there, but as we saw in 2008, not much.

The second peak is called EROEI (Energy return on energy invested). This is the one we can't get around. When it takes more energy to *get* a barrel of oil than you get from that barrel, it's game over for oil as a significant energy source.

You can't negotiate this. Economics is irrelevant. There's no energy free "innovation."

It's *this* that is coming very fast, an for which we have no solution.

Steve in Hungary said...

I was going to rip the heck out of this post too, but the previous commentors have already done a pretty thorough job of that.

The math is straightforward - if used entirely, and assuming it can all come on line at once, EOR would do the US for less than 5 years. As Mr. Moai points out the figures are extremely optimistic anyway.

I have very young grandchildren. I genuinely fear for what this world holds for them when they are my age! I suspect BAU will have long succumbed.

oliverinho said...

I think the true message is not in the headline, it is in the picture beneath it. Atleast from an (short-term) investors point of view.

Anonymous said...

It's BS: someone touting their newsletter.

"With prices so low, now is the time to buy these companies. Out of fairness to my S&A Resource Report subscribers, I can't reveal the names of my favorite EOR plays. But I can point to new technology like EOR to remind folks that the world still has a tremendous amount of oil waiting to be unlocked.

It's simply taking more innovation to find it. The winners of that innovation race will make for terrific speculations.

Good investing,

Matt Badiali

P.S. I devoted the entire September issue of my S&A Resource Report to the tiny handful of companies with big EOR exposure. As their reserves move from probable to proven, I think shares will quickly double. If oil prices climb higher, even bigger gains will come. You're welcome to check out this research with our money-back guarantee. More details here."

blah blah blah. "Subscribe to my newsletter and I'll tell you where you can make BIG MONEY..." Yeah, right.

Joseph Neri said...

If oil production hasn't peaked, why are we fighting wars over what's left?