[AAA]

.

I put together an article (below) for a local publication that deals with future oil supply issues. I am not a writer and only worked on it for a couple hours. It is basically peak oil in camouflage. I would like to get some feed back in what I should have added/deleted.

As you read in the November issue of ---, --- wrote a great article titled, “HOW LOW CAN YOU GO - OPEC?” explaining that several of the OPEC countries are going to run into major fiscal problems due to lack of government funding by the huge drop in oil prices. At the time of writing this article, oil prices have remained around the multi-year lows between $32-$43/bbl. Most people are rejoicing in the low oil prices which results in lower gasoline prices but oil & gas companies, large and small, are facing difficult challenges such as financing and future development programs. The issue that concerns me the most and is easily overlooked by majority of people outside our industry is the damage to future oil exploration and production both here in the United States and around the world.

Let’s begin by looking at a little history and some present day situations affecting the current supply and demand of oil. In 1970, the US peaked in oil production. In 2008 we produced right around half of what we produced in 1970, thus our dependence on foreign oil. The 4 largest exporters of oil to the US in order are Canada, Saudi Arabia, Mexico, and Venezuela. They contribute over 6.6 million barrels per day to the United States oil supply. The world consumes around 84 million barrels per day and the US consumes roughly 25 percent of the world supply yet we produce less than 10 percent of the world’s oil. Even our “big oil” companies like ExxonMobil and Chevron look like “Mom and Pop” companies compared to Saudi Aramco or the National Iranian Oil Company. It’s a fact that the US just doesn’t have as much oil as we need and therefore depend on others for supply.

I am sure you have heard someone say, “When Obama gets into office he will demand alternative energy to replace our foreign dependence on oil and then we won’t need all that foreign oil.” That’s great but many people don’t understand that wind, solar, clean coal, tidal, and even nuclear energy will have a relatively small impact on oil consumption. They could have a major impact on natural gas consumption used for electrical generation but 70% of our nation’s oil consumption is for transportation. Most all projects for alternative energy is directed towards electricity generation. The only way to greatly reduce our consumption of oil is to reduce our consumption of gasoline and diesel. Yet in December on CNBC it was noted that the Prius is still not profitable for Toyota. So I believe it will be many years before hybrids, hydrogen, or electric cars have a significant impact on oil consumption. Recently we have seen less demand in gasoline but that should pick up as soon as the economy picks up, hopefully sooner rather than later. But the big question remains with oil, what will happen to future supply?

Peak oil is defined as the point in time when the maximum rate of petroleum extraction is reached, after which the rate of production enters terminal decline. When many people hear the term peak oil they think of conspiracy theorist wearing Faraday cage tinfoil hats hiding from the government with a stash of guns, gold, and food in a remote area of Nevada. But like I mentioned before, the US hit peak oil in 1970 and every oil company in the world understands old fields will at some point have declining production that will never revive itself because it is geologically impossible, far too expensive, or the technology is not yet developed. Oil is a finite resource and that applies here in the US fields as well as the Safaniya-Khafji Field in Saudi Arabia. So who are the major oil producers and what is there current status?

Well, in 2007 there were 15 countries that produced over 2 million barrels per day.

(The graph didn't turn out good sorry!)

1. Saudia Arabia 10.2 million/day 9. Venezuela 2.7 million/day
2. Russia 9.9 million/day 10. Kuwait 2.6 million/day
3. United States 8.5 million/day 11. Norway 2.6 million/day
4. Iran 4.0 million/day 12. Nigeria 2.4 million/day
5. China 3.9 million/day 13. Brazil 2.3 million/day
6. Mexico 3.5 million/day 14. Algeria 2.2 million/day
7. Canada 3.4 million/day 15. Iraq 2.1 million/day
8. United Arab Emirates 2.9 million/day Source: EIA-2007 Data

Canada supplies our nation with roughly 2.5 million barrels of oil per day. Canada is our number one source of foreign oil even though Canada isn’t very foreign. They have been increasing their oil production and are believed to have the 2nd largest oil reserves in the world. Many argue Canada has far more oil reserves than Saudi Arabia since their finding of tar sands. There are only 4 major problems that deal with tar sands. First is low oil prices which are hurting the economics of current tar sand production, delaying future projects, and as Shell recently announced canceling some projects indefinitely. The second issue is the destruction that takes places while mining for tar sand. Environmental groups have been fairly quiet but that cannot last much longer due to the destructive nature of tar sand production. The third and fourth reasons are the intense use of natural gas and water needed to extract the heavy oil from the sands. However Canada is still a great supply of future oil.

Does Matthew Simmons of Simmons & Company International ring a bell? He is the author of “Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy”. Many refer to Simmons as the modern day voice of M. King Hubbert, the famous Shell geoscientist who in 1956 predicted the 1970 peak of US oil production, while others dismiss Simmons as a scaremonger. Whatever your view, the question remains how much oil does Saudi Arabia still have and when will their production begin to decline significantly? In 1988 Saudi Arabia claims its reserves increased by 50 percent but will not allow foreign companies to confirm that. Many question whether Saudi Aramco damaged their oil producing formations by letting wells flow uncontrolled when they flooded the market with oil to suppress worldwide oil prices in the 80s. The other big uncertainty is how much of their oil is from water flood projects and what is their water cut. Again Saudi Arabia will not release information that has been verified by 3rd party engineering. What we know is what they tell us.

In the first 11 months of 2008, Mexico saw its oil production decline 9.3 percent compared to the year earlier period. Pemex recently said the Cantarell Field, which accounts for 42 percent of Mexico’s oil production, will continue to decline by 15 percent each year. Many believe Mexico will stop exporting oil in 2012 or before unless oil prices rise dramatically and Mexico allows foreign investment to flood the Mexican oil fields. We import around 1.3 million barrels per day from Mexico and if they stop exporting then we need to find another source for that oil.

Venezuela’s oil production has declined a little over 27 percent between 1997 and 2007. They began increasing production in 1985 but hit its recent peak of 3.3 million barrels per day in 1997. The recent high price of $147 per barrel, set in July 2008, had Venezuela on Easy Street but the recent drop has left them staring motionless at their 2009 budget. In Caracas, the National Assembly easily passed the 2009 budget that is 22 percent larger than last year’s budget and based on $60 oil prices. Right now oil executives are hoping for $60 oil much less budget an entire country on $60 oil. With the budget uncertainty and President Hugo Chavez’s open hatred for the United States the future is unknown and in doubt since we receive about 1.2 millions barrels of oil per day from Venezuela. But as long as they need money they will sell oil to the US.

I mentioned earlier that Saudi Arabia miraculously increased their oil reserves by 50 percent in 1988 but they weren’t the only OPEC country to do so. According to the BP Statistical Review, in 1986 Iran increased their reserves by 58 percent, in 1987 Iraq increased theirs by 39 percent, in 1984 Kuwait increased theirs by 39 percent, in 1986 the United Arab Emirates increased their oil reserves by 194 percent, and also in 1986 Venezuela increased theirs by 96 percent. I don’t doubt they found more oil but that seems like rather steep increases especially since each of those adjustments happened in a time frame of 12 months. Interesting enough it was around the same time that OPEC began formal quotas. The more reserves your country owned the higher the quota your country received and the more oil your country could produce. It was basically an incentive to cheat and raise your “reserves”. But like I said…we really don’t know.

Peak oil was starting to be a household name last year when prices were jumping through the roof and people where predicting supply shortages and social unrest. Now people are saying we are awash in oil and countries are actually storing oil on tankers that are anchored offshore waiting for demand to increase and prices to rise from their recent lows. Then they will unload the tankers and sell the oil. In the mean time they sit there. So it seems the world’s oil supply in fair shape. For the time being maybe but the future supply is still uncertain.

How many companies do you know that have revised their drilling budget for 2009? I would guess probably most if not all. It is a fact low prices hurt future development. Many companies will continue running rigs but might not keep as many rigs running. Others have changed their plans on reworking existing wells because prices don’t favor it. Almost all projects are getting a second glance and companies are running the figures for a second, third and fourth time. The major oil producers are the ones that have big decisions to make. Such as the tar sands in Canada, deep offshore Brazil, and developing new fields in Saudi Arabia. What price deck would you use if you were building a $5 billion offshore platform like Thunderhorse or the estimated $400 billion project to extract oil from Brazil’s Santos Basin? I bet six months ago people were not using the recent low of $32 per barrel for their price deck.

Since many projects are getting delayed or in some cases indefinitely canceled it poses the question of future supply. The world financial markets and world economies will return to normal and growth will eventually start. Who knows if that happens in 2009 or 2012 or longer? But when it does begin to happen then the BRIC countries (Brazil, Russia, India, & China) will again start to increase their oil consumption. In the mean time lower demand and low oil prices have slowed investment into our industry and really hurt investment into alternative energy. Our only hope of kicking our oil habit is to stop using gasoline and diesel for transportation and use hybrids, hydrogen, or electric cars. The problem is car manufactures are just happy if people will actually buy cars during a recession much less spend $6,000 more for a “hybrid” that still uses gasoline. Demand will come back but will we have enough supply when that happens? If I were a betting man I would say that supply and demand will be tight and prices will rise and then surpass the all time high of $147.55 but you will notice there is not a time frame on this prediction. It could take 2 years or 10 years. We will have to wait and see.

Thanks for any feedback.

.

[AAA]

Correction: The local publication does not deal with future oil supply issues.

The local publication is a local oil industry publication.

What I meant to communicate is the article deals with future oil supply issues and I put the article in a local publication.

[Nike62]

Very good!

(I don't believe it took only a couple ours to be written...)

I don't like only the ending. Instead of: "We will have to wait and see", I'd prefer something like: "Seeing what is at stake, and how huge is the task, it'd not be wise don't start promptly the harsh but appropriate corrective actions".

[AAA]

Very good!

(I don't believe it took only a couple ours to be written...)

I enjoy reading about global oil supplies/peak oil and discuss it weekly with friends and family so I knew what I was going to say and typing comes easy to me. I also save articles that deal with the same so I can reference them easy.

The time consuming part was double checking my figures.

I don't like only the ending. Instead of: "We will have to wait and see", I'd prefer something like: "Seeing what is at stake, and how huge is the task, it'd not be wise don't start promptly the harsh but appropriate corrective actions".

Good point. The article has already been published but I will change the ending a bit and keep it for down the road.

Thanks for the input!

.