Posted: Fri Feb 11, 2005 1:24 pm Post subject: << Lynch World >>
Michael C. Lynch is a “research associate” (whatever that is) at MIT, former consultant for DRI-WEFA and currently running a consulting business called EnergySEER. He is a frequent speaker at various oil-supply related events, and is a “guest expert” in the expert section of this website. Also, he is a frequent interviewee and sound-bite provider for various newspapers and magazines when the reporter needs someone authoritative to say “there is no problem with oil supply” to balance out an article.
He has positioned himself as the main anti-PO/pro-economic spokesperson in this debate on oil scarcity, and as a result, has been in direct conflict with Campbell, Lahererre, Simmons, and others, which has, on occasion, descended to a 4th grade level and become a distracting sideshow and soap opera.
Nevertheless, in the interest of intellectual curiosity, fairness, and also, the possibility that he might be “right”, we ought to do a few models that reflect his view of the world in the interest of better understanding of the whole issue. He has left an ample paper trail to allow us to do this.
Lynch’s main argument is “Peak oil will not happen for a long time” for the following reasons:
a. Reserves are plentiful and are not “static” , that is, they continue to grow over time.
b. Extraction curves do not typically reflect the “Hubbert” model. Extraction from a given field is influenced by a lot of non-physical factors, such as policy choices and/or economics that can lead to a non-bell curve. Specifically, this extraction curve is influenced by demand, and not geology.
c. The observed decline in the discovery curve (from the late 80’s on) is mainly due to low prices making it not worth it to drill for oil. Also, most of the historical exploration drilling has taken place in North America, and very little, proportionally, elsewhere in the world. He cites figures to the effect that the drilling density per unit of sedimentary basin in the rest of the world is 5% of that of the US.
d. Because of A-C above, it is not scientific, nor particularly useful, to try to forecast a peak in production using a Hubbert-type curve. It is subject to modeler bias, and has chronically resulted in predictions of the peak (by Campbell and others) that are too conservative. This has resulted in frequent inaccurate peak predictions and loss of credibility. Another criticism is the use by Campbell and others of a proprietary database of reserves and production, and not allowing others access to the data for alternate modeling and other interperetations. (This is the point in the debate where it usually degenerates into name calling and mud slinging).
So, as a public service, and to see what this sort of world might look like going into the future, I have generated a few models based on data provided by Lynch just for the pure joy of seeing what will happen if what he says is right.
Assumptions:
a. Reserves are not static, but growing all the time. Lynch quotes USGS 2000 estimate that reserves are capable of growing an additional 600 gb, the current “known reserves” are 1400 gb, and that the additional remaining possible supply (URR) is 2000 gb. Per the analysis we did the other day, last years’ “reserves growth” net of discoveries, was about 2.5% (per O and G Journal). So, in this model, reserves can grow by 2.5% each year until cumulative reserves growth reaches 600 gb.
b. Discoveries will increase over time. For the base assumption, we will assume 9gb discovery rate, growing at 10% per year, until the sum of known reserves, cumulative discoveries and cumulative reserves growth reaches the USGS estimate of 2000 gb, unless otherwise indicated.
c. Demand growth will occur at some level between population growth and GDP growth. I’ve assumed a global average GDP growth of 3.5% per year, and an “energy decoupling” of .6, based on the paper published the other day by the OECD. This gives a net demand growth per year of about 2.1%, which is consistent with Lynch’s 1996 testimony before the House Energy Committee. I probably should have just based it on population growth and per-capita energy usage remaining constant at about 4.5 bbl/person, but this reflects energy usage increases in the developing nations, so I believe pretty close to accurate.
Posted: Fri Feb 11, 2005 1:25 pm Post subject: Lynch World (Part 2)
Here are the models:
Scenario A: Unconstrained extraction: Using the base assumptions about supply limits, above, the world can pump as much oil as it needs to satisfy demand, reserves will increase per the above for as long as they can.
In this model, known reserves will reach a maximum at about 1760 gb in 2024, when they actually will hit the constraints suggested by the USGS and gradually decline. There will still be sufficient reserves for production to continue to increase until at least 2049, which is my definition of “a long time”. Shortly after this, however, there will be a train wreck of terrible proportions when reserves are exhausted. Only about 300 gb of reserves will remain by 2049, and consumption will be at nearly 80 gb per year, so only 3 years of reserves left.
Scenario B: There is a “bounty” of petroleum, with known reserves of 1400gb, and “reserves growth” potential of an additional 1400 gb (which would mean that there is actually twice as much oil down there as we think we can now get). The discovery level is 9gb now, and increases at 10% per year. The URR is 5000 gb, 5 times higher than suggested right now. Same demand rate, etc. as above. Even in this model, “known reserves” finally reaches a maximum at about 4300 gb in 2045, and decline sets in. Since production is unconstrained in this model, the production curve is just like the one above, except obviously the resource depletion is put off until late in the century.
Scenario C: “Constrained” production. We did a model some time ago in which we took actual production decline curves of various nations, indexed them to make them all the same scale, and computed the average in order to get an “average” production decline curve, so this “experienced based” curve represents what actually happened when nations started to experience a production decline. In Model C, we make the assumption that after the point of maximum reserves, “depletion” sets in, and production becomes more difficult (as has been the actual experience). We noted at the time that the model did not necessarily follow the Hubbert curve. Also, in this model, we make slightly more modest reserve assumptions: Known reserves are 1400 gb, “potential reserves growth” is 700 gb, current discoveries are 9gb and declining at 10% per year, representing a continuation of the trend as it now exists. Reserves growth the same as above, 2.3% per year, and demand growth of about 2.1% per year. URR is the USGS 2000 gb, which means that eventually, increases in reserves will be dictated by the reserves growth rather than by discoveries.
In this model, known reserves reach a peak in 2024. Extraction reaches a maximum as of that year of 43 gb/y and begins the assumed sporadic decline at that point. The 2050 outcome is that there are still about 573 gb of reserves left, but since extraction has become more difficult, only about 30 gb per year is being extracted at that point, so there is still 18 years of production left, longer, really because extraction is getting smaller every year. This is an improvement over Scenario A.
Scenario D: “constrained” production with more “Campbellesque” assumptions: Current known reserves are 1340 gb, but “potential reserves growth” is 160 gb, and URR is assumed to be 1600 gb. Reserves growth happens at the same rate as it did last year, 2.5%. Discoveries are 7 gb/y currently, and decreasing by 10% per year. Same demand estmates, and also same assumption that demand will follow the “experienced based” decline curve posted earlier.
In this scenario, known reserves reach their maximum in 2009 and extraction becomes more difficult at that point (the “peak”, if you will). By 2050, there are still about 300 gb of reserves remaining, but extraction is at about 15 gb/yr meaning about 20 years of extraction left before reserves are exhausted.
Posted: Fri Feb 11, 2005 1:32 pm Post subject: Lynch World (Part 3)
Discussion:
a. Here is a little summary table of the models and what the conditions will be in 2049:
Scenario Reserves Production Res Yrs Left Per Capita Oil Cons
A 289 74 4 8.35 b/y
B 3878 74 52 8.35 b/y
C 573 31 18 3.48 b/y
D 300 15 20 1.65 b/y
d. It is clear from tinkering with these models is that the key driver in all of this is the issue of “reserves growth”. If “reserves growth” is finite, the decline starts at whatever point the reserves growth (plus minimal discovery) is no longer able to keep up with consumption. In the first two models, where potential reserves are large, the only thing that is gained is a few more years of acceleration before the proverbial energy consumption car hits the proverbial brick wall, if you know what I mean.
e. Lynch never does, in everything I have seen, come out and say “there will be no peak”. He also never does come out and say (at least in the public domain) reserves are X, and reserves growth is Y. What he does say, is “there will be no imminent peak”, and does a lot of criticism of the models and modelers. The other thing he does not come out and say is what will happen if we go along our current path, and hit a peak later when consumption is a lot higher than it is now.
f. This trend of declining discovery noted by ASPO is argued against by Lynch, and I believe this argument may have some validity. I did regression analysis the other day with rig count compared to oil price, and found a correlation of .77, which means, indeed, the economists are right, in that the higher the price gets, the more holes get put in the ground. Also, because of seismology, etc. the success rate of hole drilling is better now than it used to be so it is possible that the increased prices will bring about an increase in discoveries. This will be easy to check going forward, all we have to do is monitor discoveries.
g. An “alternates and substitutes” term could be put in here to the effect that as time goes on, people will find alternates and substitutes, and this will take pressure off the system. If this is the case, the way out will be that when A+B+C<D (a=reserves growth, B=discoveries C=Alternates and D=consumption) we will have turned the corner, so if you can get C high enough so that when A and B stop, C will have to be big enough to catch up, or else the crash happens. A rookie modeler can adopt this as a project.
h. It is probably true that I used too simplistic a model for reserves growth, at a fixed 2.3% over time until it reached some cumulative maximum. You can make the argument that reserves growth will not all of a sudden stop after a certain number of barrels is found, but will go from 2.3% and decline slowly over time. This is good, because it would lessen the severity of the train wreck when it happens, and result in better conditions down the road, but harder to model, so that is why I did not do it.
i. The exception to (f) above might be a scenario where we find out that the reserves numbers we have been given for all of these years is a pack of lies. If this happens, maybe the train wreck will have already happened, and like the proverbial tree falling in the forest, we just did not hear it. Example: After several years of production declines, somebody finally admits, "yeah, we have been cooking the books since Year X” but the likelihood of this actually happening is pretty minimal. More likely that we will have several years of production declines, and somebody will keep saying “remain calm, all is well”, when we will all know what is up.
j. So, I guess, in summary, I have the following questions for Michael Lynch, when it is his turn for “ask the experts”: 1. Is reserves growth finite? It would be helpful if he would give some suggestions as to what the maximum limits are, and at what rate reserves will grow. 2. Will there be a peak, ever? What is your definition of “a long time”. After that, I think we can do the math and figure out the reprecussions.
Joined: May 24, 2004 Posts: 1932 Location: Richland Center, Wisconsin
Posted: Fri Feb 11, 2005 3:54 pm Post subject: M.Lynch Models
I really appreciate this Pup. Thank you.
I've tried to bring him back into some of the discussions here and I have been met with utter silence a few times now. _________________ --------------------------------
| Whose reality is this anyway!? |
--------------------------------
(-------< Temet Nosce >-------)
____________________________
Joined: Sep 05, 2004 Posts: 205 Location: Washington, DC
Posted: Fri Feb 11, 2005 4:21 pm Post subject:
Lynch's analysis have always bothered me. At work, I would never make decisions based off of the logic and data that he has provided. Few do at my company, we get rung out to dry if we do... but in fairnes:
1. Extraction curves do not typically reflect the “Hubbert” model.
It is very true that extraction from a given field is influenced by a lot of non-physical factors, such as policy choices and/or economics that can lead to a non-bell curve. Absolutely, no question. I think the Hubbert model works extremely well for places like the Lower 48 us and Egypt, and the North Sea is that politics in these regions had pretty minimal effects. Also, unlike Cambell, Simmons, Laherre, et al... I have never seen any data from Lynch that is comprehensive for the entire industry. Lynch's point is noted well here... and data I've seen leads me to suspect that the superstraw bottlebrush wells tend to push the peak past the 50% depleted mark.
2. The observed decline in the discovery curve (from the late 80’s on) is mainly due to low prices making it not worth it to drill for oil. I did regression analysis the other day with rig count compared to oil price, and found a correlation of .77, which means, indeed, the economists are right, in that the higher the price gets, the more holes get put in the ground.
I think that this is only partially true. First we find that discovery has been declining more or less since the mid-60s or so. We use more than we discover every year since the early 80s. From my own studies looking at discovery vs. price since the 40s, there is almost zero statistical correlation. Not even a general trend. Even the North Sea and Alaska discoveries were made during a falling discovery period. A particularly damning bit of info is that wildcats rates have no statistical correlation with discovery rates, which is all that matters. Holes in the ground don't mean anything unless you're an avid golfer. He should be looking at more significant factors than holes.
3. Also, most of the historical exploration drilling has taken place in North America, and very little, proportionally, elsewhere in the world. He cites figures to the effect that the drilling density per unit of sedimentary basin in the rest of the world is 5% of that of the US.
Yes, this is absolutely true. However, one of the biggest ACTUAL benefits of seismic 4-D etc... is showing people were definitely the oil is NOT. Just because there is an anticline, doesn't mean there is any sort of geological discontinuity buried below it which might be oil. In the old days, there was a hell of alot more guesswork. Lynch should check when many of those US exploration wells were drilled, he will see lots of "guess holes" from the early days.
4. Lynch never does, in everything I have seen, come out and say “there will be no peak”.
Well, nobody says that... except for maybe the abiotic folks.
5. Because of A-C above, it is not scientific, nor particularly useful, to try to forecast a peak in production using a Hubbert-type curve. It is subject to modeler bias, and has chronically resulted in predictions of the peak (by Campbell and others) that are too conservative.
I think that one needs to evaluate more than just the models of Campbell and Laherre. The Chris Skebowski analysis of megaprojects vs. demand growth and existing field declines is very clear evidence that there will certainly be problems in 2008 or so, if current conditions persist. This doesn't necessarily mean ultimate peak. The oil industry itself (through Accenture, Deloitte consulting, Exxon Mobil, and Chevron) have each said, independantly that an additional 50 mbd production capacity would be needed by early next decade to meet projected modest demand growth and projected conservative field declines.
6. "Alternatives and Substitutes". I have a friend doing some business case studies on ethanol as part of his MBA program for an oil compnay. We talked about it... he built an entire case on the assumption that 100% ethanol can replace gasoline. There was no understanding of physics anywhere, such as how an internal combustion engine works... and that 100% ethanol doesn't work very well in the 600 million vehicles on the planet. That it is very possible corn-based ethanol production uses more oil than it produces (the models I've studied on this subject haven't convinced me either way... the only conclusion I can draw is that at best, the net energy of ethanol production is low). There is no accounting for the land area required to grow the corn to produce ethanol. Very poor work.
In all of this, in the grand scheme of things, scenario C is probably a pretty reasonable prediction of what could happen, if the USGS numbers are right. Increasing consumption, depletion hits in the mid-2020's, and there is still 3.5 barrels per year of consumption per-capita, about 75% of what there is now, by 2050. This would give some breathing room for conservation, alternates and substitutes, and new technology to happen. The global population will be about 9.1 billion by then, so things will be getting a little crowded, but it might be liveable.
Such is right about one thing, though, which is that at least publicly, in the presentations below, he never does put forth a constructive argument as to how he expects all of this to play out. His main mission appears to be to attack the modelers. If he had done like we did, at some point, and suggest some alternative scenarios based on some data, we might understand a little bit better where he comes from. Maybe he is doing it with his private customers and not putting it out into the public domain.
It is interesting to go through Lynch's website and look at some of his recent presentations. He expects a really crazy market for the near term, which he attributes to some of these supply issues. Also, he has a partner who is doing a lot of work in NG and they expect a crazy market in that fuel as well.
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