The Shell Answer Man, Part II

THE PRESIDENT OF Shell Oil Co., John D. Hofmeister, is about midway through a 50-city speaking-and-listening tour, talking about the national energy situation on behalf of Shell. Last week, he brought the tour to Pittsburgh. In Part I of this report, I provided an overview of the energy message that Mr. Hofmeister is delivering on behalf of Shell, embodied in the title of the speech that he has given, in one form or another, in many cities, “How the U.S. Can Ensure Energy Supply for the Future.”

Shell’s Mr. Hofmeister is talking about oil and natural gas, of course, which is what you would expect from the man who runs Shell. But he is also talking about other energy resources such as coal, tar sands, oil shale, heavy oils, biomass, fuel cells, solar power, wind power, and even plain-old energy conservation. It is quite a comprehensive overview, and the theme of the presentation reflects the energy investments and technological pathways that Shell is pursuing. When asked why he is not discussing nuclear power, Mr. Hofmeister states that Shell does not have corporate expertise in that field and thus he is willing to leave that radioactive energy source for others to review. Fair enough.

It Sounds Like the Peak Oil Issue

What is that old expression about, “If it walks like a duck and looks like a duck and quacks like a duck”? Here we have the president of one of the world’s largest publicly traded oil companies, in business for well over a century, traveling back and forth across the land to hold a national energy discussion. The man from Shell states in no uncertain terms that conventional crude oil is getting harder to find and extract. He begins his talks by offering a definition of “energy security” from the perspective of Shell Oil. That is, energy security means ensuring an available, affordable supply of energy for the present, the foreseeable future, and generations to come. The implication is that Shell is on the cutting edge of a strategic vision for delivering energy supply to the nation’s and world’s consumers within a market system, and working to be part of any transition or transformation from where we are now to where we will be many decades from now.

In his speeches across the U.S., Mr. Hofmeister has clearly described how the search for oil and natural gas reserves is moving into distant, dangerous expensive places to operate. Of course, he promotes opening up remote and expensive places for drilling, such as the U.S. Outer Continental Shelf (OCS). This OCS issue is, if you do not know, part of the DNA of every true oilman, certainly including this correspondent. And Mr. Hofmeister is discussing the massive, long-term, and very costly investments that his company is making in alternative energy sources, from tar sands of Canada to oil shale in Colorado. He describes other exotic and expensive energy investments that Shell is making in coal gasification and coal-to-liquid (CTL) technology, as well as in fuel cells, solar cells, and wind power. It all sounds, to the informed listener, like Mr. Hofmeister is discussing the Peak Oil issue.

The Peak Oil Paradigm

All of what Mr. Hofmeister is saying certainly fits in to the standard Peak Oil paradigm, which is that mankind has generally located, if not discovered, most of the conventional crude oil that there is to find in the crust of the Earth, and has produced and consumed something near half of it. That is, out of a conventional, worldwide resource base of conventional oil that is estimated by some knowledgeable commentators at about 2.2 trillion barrels, about 90% has been discovered and about 1 trillion barrels have been extracted and consumed over the past 150 years or so. At the present time the global oil industry is pumping the world’s known oil reserves at a rate of about 1,000 barrels per second, or 85 million barrels per day (mbd), or about 31 billion barrels per year. And the global economy is, as frequent readers of this column know, consuming or otherwise burning up almost every drop of that oil. And not to get too preachy, but watch what happens if just a couple of hundred thousand barrels per day of production (near a rounding error from a production base of 85 mbd) go off line, such as occurred last August when BP closed the Alaska pipeline.

So do the math, dear readers. Follow the facts. Watch the trends. Mankind is at the top (or “peak”) of the conventional oil production curve. The world’s major oil provinces and largest oil fields are barely holding steady in production (Saudi’s Ghawar Field, for example), or are in irreversible decline (U.S. Lower 48 and Alaska, North Sea, Mexico’s Cantarell, Kuwait’s Burgan, China’s Daqing, Russia’s Samotlor and Romashkino, and many others). The world is pumping and burning oil that was discovered decades ago. And despite massive and costly efforts at exploration, overall, the global oil industry is pumping conventional oil reserves out of the ground at a far faster rate than it is discovering new reserves. So in the past few years, “new” oil production has barely kept up with depletion and decline in volumes produced from older areas.

“Call It a Banana”

Yes, do the math. These facts are the heart and soul of the Peak Oil discussion, dear readers. There is a lot of conventional oil in the crust of the Earth, and obviously, there is enough to support current daily global oil production of around 85 mbd, at least for a while. But only for a while. (How long? Good question.) What happens when conventional oil volumes begin to decline in an appreciable manner? This is exactly why big oil companies like Shell, and most government-owned oil companies, and many other large and small firms from around the world, are investing feverishly to develop alternative sources of hydrocarbon production, other energy sources, and advanced energy conservation concepts.

Thus, the future of conventional oil production bodes ill. The most likely forecast is that the rate of oil extraction will hold more or less steady and bounce along, at a maximum production plateau of about 85 mbd for some relatively short-term period of years, and then eventually follow a downward trending and irreversible curve of decline. Call it “Hubbert’s Peak” if you wish, after the title of the fine book by Princeton geology professor Kenneth Deffeyes. But Hubbert’s Peak is only a label. Call it something else, if you wish. You might even want to quote the late, great Groucho Marx and “Call it a “banana.”

Plenty of Uncertainty

So yes, the Peak Oil scenario rests on the assumption that the world’s largest oil provinces, in both area and volume, have been located from Texas and Mexico to Saudi Arabia and Iran, from the North Sea to West Africa, from Western Siberia to Northern China, from many spots here to many other spots there. But no, for all the purists out there, this does not mean that we know where every deposit of conventional oil is located, to a precise grid description on the face of the planet. There is plenty of uncertainty about the future of exploration and production. There are, to be sure, many dry holes yet to be drilled.

Rest assured that the world’s oil industry will be exploring for oil and drilling wells far into the future, to recover the valuable hydrocarbon product from the rock beds of the Earth. And it means that the future of conventional oil exploration will be one in which those geologists and drillers look for smaller and smaller oil fields, in more and more remote locales. There will, of course, in that oil-searching future be plenty of good jobs and good wages for geologists, geophysicists, and engineers of every ilk and stripe, and drillers and logisticians and the myriad of oil service personnel who make it all happen. And again, to his credit, Shell’s Answer Man Mr. Hofmeister has given more than a few speeches addressing the industry-wide chronic shortage of personnel with critical skills that is currently hamstringing many exploration and production efforts.

The Peak Oil Question

As I mentioned in Part I of this article, Mr. Hofmeister takes questions as well as gives speeches. And so I asked him straight up about Peak Oil: “Mr. Hofmeister, does Shell Oil have a corporate policy or position on the concept of Peak Oil, which you know was pioneered by former Shell geologist M. King Hubbert?”

And here is exactly what Mr. Hofmeister said: “Among informed Shell executives, there is a rejection of the Peak Oil theory.” Peak Oil is, he stated, “based on flawed assumptions.”

Mr. Hofmeister listed three reasons why Shell executives reject Peak Oil theory:

1. Peak Oil deals with conventional oil and does not take into account sources of unconventional oil, such as tar sand, oil shale, and heavy oil.
2. Peak Oil assumes that technology is static, when, in reality, there have been “huge strides” in the ability to enhance oil recovery from older oil fields.
3. By diversifying energy resources, “People will switch demand to other energy sources” long before conventional oil runs out.

Amplifying this last point, Mr. Hofmeister mentioned an old saying that has been, I believe, first attributed to former Saudi Oil Minister Sheikh Zaki Yamani, that “The Stone Age did not end for lack of stones, and the Oil Age will not end for lack of oil.”

And finally, Mr. Hofmeister made another comment along these lines: “We will reach Peak Oil, but not for lack of oil.”

Not for Lack of Oil?

Earlier in this article, I mentioned the old expression that “If it walks like a duck and looks like a duck and quacks like a duck…” Well, there are more ducks here than on Old McDonald’s Farm. I honestly admire and commend Shell Oil Co. and Shell’s Mr. Hofmeister for going around to discuss the energy predicament of the U.S. and the world. Mr. Hofmeister is saying many of the right things, in my view, and he is in a position to know what he is talking about. But what is going on? What is with the Peak Oil denial by Shell?

According to the president of Shell, Peak Oil is “based on flawed assumptions”? I just do not get that. Actually, the mathematical support of the Peak Oil argument is based largely upon industry-supplied data sets. That is, Peak Oil is based on historical and current production data for conventional oil, and the only place to get that kind of data is from industrial summaries such as the BP Statistical Review or Oil & Gas Journal or by summarizing collections of government-mandated data. So not to overstate the issue, but it is the camp that diminishes or denies Peak Oil that is using the flawed assumptions.

Conventional Oil

The critics focus on the point that the Peak Oil concept focuses on conventional oil, and does not take into account other hydrocarbon alternatives. Well, yes, after a fashion. Peak Oil is, and always has been, about “conventional oil” recovery. The discovery and recovery of conventional oil has been occurring for about 150 years, since 1859, when Col. Edwin Drake pounded down his famous well at Titusville. When former Shell geologist M. King Hubbert first articulated the Peak Oil concept in the 1950s, conventional oil was the whole ballgame. And the world is now at the point at which conventional oil extraction is a more or less flat, at a production rate of something over 80 million barrels per day (mbd), with the balance in natural gas liquids and other energy fluids.

And this “conventional” oil distinction of the Peak Oil argument is not some sort of “flaw” in the assumption; it is critical to understanding the point. With the exception of just a few million barrels per day of heavy oil, very sour crude, oil from tar, and a few other exotic forms of hydrocarbon, the entire world’s industrial liquid fuel infrastructure is wired and plumbed for conventional crude oil. This is the 150-year legacy of past investment at work. For example, the plastic and rubber gaskets in the engines of almost all of the world’s 500 million or so motorized vehicles are designed for use with oil-based gasoline, and rapidly corrode if ethanol is used for fuel.

Look at it from the other perspective. The world simply does not have the industrial infrastructure to produce 85 mbd of “alternative” forms of hydrocarbon fuel and there is no program in place to construct it, certainly not over the next few decades. After 20-plus more years of investment in the tar sands of Alberta, for example, the government of Canada is forecasting at most about 3 mbd of synthetic crude oil production by 2025. And this will require immense amounts of fresh water and natural gas, the supplies of which are entirely problematic.

And for all intents and purposes, there is simply no oil shale industry (let alone a world-scale oil shale industry), despite over a century of periodic hype to include the research performed by Shell in Colorado. Coal-to-liquid (CTL) efforts are embryonic, and it is a fair statement to say that no one really knows what a large-scale CTL industry will look like, what the technology will entail, what the environmental impact will be, and what the energy return on energy investment (EROEI) will be.

Technology

The critics also often argue that the Peak Oil thesis does not take into account new forms of technology that expands the reach for oil to deeper and more remote locales, or new equipment and processes that improve oil recovery from rock formations.

Actually, the improvement in technology is one of the things that demonstrate the point of Peak Oil. The “easy” oil has been found, and Shell states as much in its corporate advertising, along with Chevron, BP, and most other oil companies that pay good money to advertise their efforts. A deepwater oil well in the Gulf of Mexico, for example, costs in the neighborhood of $125 million, as was the case with Chevron’s 28,000-foot Jack-2 well that drew so much attention in September 2006. Would Chevron, or any other oil company, drill 28,000-foot wells that cost $125 million if there were cheaper alternatives? Deep, remote, expensive exploration and production wells make the case for Peak Oil, not diminish it.

As for enhanced oil recovery (EOR) methods, again these technological advancements make the case for Peak Oil. On the one hand, EOR is a market response to the rising price of conventional oil, so EOR merely illustrates that oil is becoming scarce and worth more investment to recover from the ground.

At the same time, EOR merely allows the oil producer to recover a higher percentage of the oil in place. EOR does not “make” any new oil in the rock formations. What is down there is down there, and EOR is just a way of leveraging your investment in a hole in the ground to get more oil out, and often as not to get it out more quickly. Whether your methodology is to drill horizontal wells or to perform multilateral completions or to inject water or gas to keep up the reservoir pressures or pump surfactants or other chemicals into the oil-bearing formation, what you are doing is mobilizing the oil and accelerating oil extraction from the future into the present.

The Peak Oil problem with EOR comes when the distant future shows up and becomes the present. Then, your extraction drops precipitously and your irreversible decline curve kicks in with a vengeance. Oil-producing regions such as Mexico’s Cantarell, the North Sea, or even parts of Saudi Ghawar illustrate the point. These great oil-producing regions have been the subject of EOR since the 1980s, and now their annual production decline rates are in the range of 12% and more. And compounding the problem, the decline in production leaves a major gap in the supply curve going forward, particularly since no one is “discovering” any other new oil provinces like Ghawar, Cantarell, or the North Sea.

So EOR is a technological means of pulling more oil out of the same holes, but it is not a contradiction to the argument embodied by the term “Peak Oil.”

Consumer Behavior

As for the argument that people will change demand and consumption habits long before we “run out of oil,” this is actually part and parcel of the basic Peak Oil thesis as well. Peak Oil is real, as are markets and market behaviors. Prices rise, and people react.

And of course, people will change their habits as conventional oil becomes more and more scarce, and expensive, going forward. They will have to, just as the world changed its consumption habits in 1978 and 1979 when the Iranian Revolution took almost the entire petroleum output of that nation offline within a matter of months. When the oil was not there, it was not there. Prices rose. People changed behavior. Economies crashed. And so it will be in the future. We can prepare or not, with a sense of urgency or not.

Moving the Goal Posts

So to my way of seeing things, it is the critics of the Peak Oil concept who keep attempting to redefine the terms. In one intellectual form or another, they keep trying to move the goal posts whenever some new evidence comes along that makes a new point within the discussion.

But this two-part article concerns Shell Oil Co., its president, John Hofmeister, and his traveling speaking tour. Shell and its president are attempting to hold a national energy discussion and to get people at the grass roots thinking about whence will come the nation’s energy supply in the future and the need for a true long-term national energy strategy. The Shell Answer Man is putting quite a bit of valid, accurate information about energy out on the table for all to see, from the depleting oil situation to the need for significant energy conservation efforts. Bravo.

We can disagree about this feature or that of what Mr. Hofmeister is saying, and even differ about the name on the label. Is it “Peak Oil” or no? I happen to believe that it clarifies the thinking process to call things by their correct name. But then again, it all may be of little consequence in the long term. We shall see. As our Arab friends say, “The dogs bark. The caravan moves on.”

Until we meet again…
Byron W. King

February 23, 2007