Decline of Peak Oil

Decline of Peak Oil: Nothing Like Business as Usual
A Daily Reckoning Whitepaper Report, By Byron King

ALI SAMSAM BAKHTIARI is a retired “senior energy expert,” formerly employed by the National Iranian Oil Co. (NIOC) of Tehran, Iran. He has held a number of important positions with NIOC since 1971. He is currently attached to the director’s office in the Corporate Planning Directorate of NIOC, and specializes in questions related to the global oil, gas and petrochemical industries. This alone ought to pique your interest because Bakhtiari has the ear of the most important decision-makers in Iran. What is he telling them?

Fortunately for us in the West, Bakhtiari is also an independent consultant who writes and speaks to a worldwide audience on the subject of oil depletion in general, and Peak Oil in particular. His tribal name, Bakhtiari, means “companions of good fortune,” and the story of his life is somewhat emblematic of that meaning. Based on what I have seen, Bakhtiari has a gift for understanding, and a unique ability to share this gift with others. There are few more qualified people in the world who can discuss Peak Oil. So when Bakhtiari talks, people ought to listen.

And as an aside, anyone within the Western diplomatic or military community who deals with Iranian issues at almost any level needs to understand what Bakhtiari has been telling the leadership of Iran. What do the mullahs know about oil that you may not know? It might just explain a few things about Iranian behavior.

Decline of Peak Oil:Oil at $100-150 per Barrel

In a recent public address to the Senate of Australia, Bakhtiari stated that “I can see a range of $100-150 [per barrel of oil] not very far into the future.” He amplified this statement as follows:

“We are entering an era in which we know nothing much, where we have a brand-new set of rules…One of these new rules, in my opinion, is that there will be in the very near future nothing like business as usual. In my opinion, nothing is usual from now on for any of the countries involved. And the lower you are in the pile, the worse it is going to get.”

Bakhtiari believes that the world is at Peak Oil, producing about as much conventional oil on a daily basis as will ever be produced, now about 84 million barrels per day. From here on, the oil markets of the world will be dealing with the ongoing effects of oil field depletion and irreversible production decline. By 2025, Bakhtiari expects that the world’s daily production of conventional oil will fall to a level between 50-55 million barrels of oil per day. Bakhtiari counsels that the world’s governments, industries, and people accept the fact and begin to prepare. There is no time to lose.

Bakhtiari is pessimistic about the prospects for large-scale energy projects based on manufactured fuels, such as coal-to-oil and gas-to-oil projects. His reasons are many, ranging from the scale and cost of such projects to the raw environmental degradation they cause. In addition, much of the feedstock for these projects, for raw material and/or process heat, is supposed to come from natural gas. But natural gas supplies are about to “peak” worldwide and commence their own irreversible curve of decline, so this is not a long-term solution. Of the 30-million-barrel-per-day decline in conventional oil production that Bakhtiari envisions over the next 20 years, he anticipates that manufactured fuels will substitute for only about 5 million barrels per day. “This is a drop of water in the ocean,” says Bakhtiari.

In addition, Bakhtiari is pessimistic on the future of ethanol as an oil substitute, because it will pit the world’s food supply against the needs of the world’s built-up transportation system for liquid fuels. “People have to eat,” says Bakhtiari.

Decline of Peak Oil:Four Phases of Decline

Bakhtiari views the future in terms of four phases of transition, or, as he puts it, T1, T2, T3, and T4. Fortunately for the world’s users of petroleum, the “hidden advantage” of Bakhtiari’s T1 is that worldwide oil supplies will remain almost constant during this initial phase. That is, new discoveries and production that is now coming on line will compensate for the production that is lost due to depletion. T2, T3, and T4 will be, as Bakhtiari puts it, “more turbulent phases.”

At the end of T1, Bakhtiari envisions “two major scales tilting.” There will be a supply of conventional oil, all of which will be subject to world demand. That is, there is not now, and will not be at the end of T1, any “swing” production, such as the cushion that Saudi Arabia provided during the past 40 years or so. Supply will dictate demand, and when the supply is gone, the demand will go unsatisfied. “In the end, it will be the total shift” to oil supply dictating demand. Rising prices will clear the market, and the prices will rise precipitously.

According to Bakhtiari, one of the key problems for the world in facing this ongoing T1 phase is that so-called “mega projects” for high-cost oil and other alternative fuels take 10-20 years to construct and come online. These mega projects include such things as large offshore oil developments in deep water, substitute oil industries that manufacture oil from natural gas or coal, or refineries capable of handling heavy oils or tar from tar sands. The problem is that rising oil prices, and spot shortages in the coming years, will trigger increases in prices for other commodities, like cement and steel.

Decline of Peak Oil:Rising Costs and Risks for Capital Projects

One prominent example that illustrates Bakhtiari’s point was just announced by Shell Canada Ltd. Shell Canada recently announced that an expansion of its Athabasca oil sands project will cost as much as $12.8 billion, because relentless cost pressures are swelling its budget. This is nearly three times the cost per barrel that was originally planned, as recently as 2002. According the Shell Canada’s president, the economic environment has changed “quite substantially” in just a few years.

As recently as mid-2005, Shell Canada estimated that expanding its plant at Athabasca would cost about $200 per barrel per day of capital cost. Now the estimate is that the eventual cost will top $300 per barrel per day, and possibly approach $350 per barrel per day. That is, under these cost estimates, a facility capable of producing 10,000 barrels per day of oil equivalent product might cost as much as $3.5 billion just to build, let alone the future costs of to operating on an ongoing basis. And to construct facilities capable of producing 1 million barrels per day of oil equivalent will require a capital investment of about $350 billion.

At the same time, major companies that operate in the international environment are seeing their political risks rise along with the capital costs. Increasing exposure to large projects in problematic countries has taken much of the edge off the previous enthusiasm for expansion in such regions. For example, in Venezuela, the government of populist leader Hugo Chavez is tightening the terms of operating contracts, and imposing royalty and tax rates that are all but confiscatory.

Venezuela recently announced that it was reforming one of its production contracts with Chevron to create a “joint venture” between Chevron and Venezuela’s state-owned oil company. The net effect is to remove 90,000 barrels per day of oil production from the control of Chevron and place the oil under the control of the Venezuelan entity. In order to meet its own requirements for volumes of oil, Chevron will have to find other sources of petroleum. While Chevron has announced that it plans to remain in Venezuela, some other major Western oil firms are contemplating simply abandoning operations there.

In addition, many major capital projects are subject to damage from natural events, such as last year’s Hurricanes Katrina and Rita. Chevron, for example, recently announced a $300 million charge against earnings for uninsured damage caused last year to its Gulf of Mexico operations during Hurricane Katrina.

Decline of Peak Oil:Five Steps of Preparation

Bakhtiari has a “to-do list” of what he considers to be the most urgent steps for governments, businesses, and private individuals. His list is worth highlighting here:

(1) Reprogram the mind. That is, just throw out any previous business-as-usual thinking and similar rosy scenarios. Nothing will remain as usual, going forward. This also means that people should engage in as much lateral thinking as possible. Do not just come up with Plan B, but come up with Plans C, D, and E as well. People should challenge themselves, and their associates, not just to expect the unexpected, but to begin thinking the unthinkable.

(2) Reduce oil consumption, mercilessly. According to Bakhtiari, the normal 30% of wasted use should be shed offhand. Governments, businesses, and individuals should also pay down debt levels as swiftly as possible, because the effects of T1 will inevitably bring higher inflation and interest rates. Minimize travel of all sorts to economize use of oil-derived fuels, because it is going to happen in any case. Reduce all types of consumption and just plain get leaner and be ready for even bigger cuts. This is as close to where you live as revising home lighting and heating systems, and also includes reducing the size and number of automobiles as soon as possible.

(3) Reuse as much as possible. Many things are easily reusable, but it will require a mental focus to accomplish the effort. Whether it is plastic bags or retreaded tires or outdated appliances, it is important to adopt a new cultural mind-set toward the scarcity of manufactured goods and products. The most important thing to care for and husband may well be fresh water, which is already in short supply and will almost certainly be a precious commodity in the future. Bakhtiari even mentions wood as a future critical commodity.

(4) Recycle as much as possible. Bakhtiari believes that tomorrow’s industrial boom will be in recycling industries on a worldwide scale. Recycling much of what is now considered garbage should be made mandatory, as in Germany or a handful of U.S. cities, such as Seattle and Pittsburgh. Industrial production should design “recycling” into products from the time they are on the drawing board, as is now the case in some sectors of the automobile and computer industries, as well as some other business sectors.

(5) Reward people for their efforts. Bakhtiari urges using market incentives to reward people for reducing, reusing, or recycling. It is far better to make use of positive subsidies, instead of negative reinforcement. The implications of Peak Oil are negative enough even without the prospect of negative reinforcement.

Decline of Peak Oil:Addicted to Oil and Cold Soup

“Whether we like it or not,” said Bakhtiari in a recent posting, “all developed societies are addicted to crude oil and its myriad derivatives.” However, he continues, “Many decision-makers are trying to park ‘Peak Oil’ in the farthest corner of their minds (praying it will go away), and remain in denial that there is no replacement for oil.” Bakhtiari amplified this comment in another discussion:

“Nobody likes the idea of Peak Oil. Firstly, you have the politicians. Naturally, a politician will never say that there is such a thing as Peak Oil. It is suicide to give bad news, so a politician will never do that…Secondly you have the media. The media do not like Peak Oil. Why? There is no sponsorship for Peak Oil. The oil companies do not like Peak Oil because you should not say that your soup is cold; you should always say that it is very hot and very tasty, yes? So nobody wants to hear of this phenomenon of Peak Oil.”

Decline of Peak Oil:Where Do We Go From Here?

Bakhtiari is a prolific writer and speaker, and he has much more to say on the subject of Peak Oil. We will review his work in future Whiskey & Gunpowder articles. But for now, where should leaders in the government, business, and the private sectors be focusing their attentions? Here are a few ideas.

Governments and the private sector should make every effort to come up with projections of oil production and demand at local, regional, national, and international levels. Based on these projections, the next step is to assess the implications of reduced availability and dramatically higher prices for oil and related transportation fuel.

Governments and the private sector should also, at the same time, strive to reduce in absolute terms local, regional, and national demands for oil and oil-related products. The oil supply simply will not be there a few years hence. Thus, it is imperative to make energy policy that allows classical market mechanisms to work rapidly, in order to foreclose the future political urge during the next “crisis” to come up with some sort of top-down, command economy form of coercive policy.

Related to the foregoing, governments and the private sector should work to assess the potential of new sources of liquid fuel, and alternative transportation methods, to meet (or, preferably, substitute for) a significant share of respective national fuel demands. This must take into account technological developments and both short- and long-term environmental and economic costs.

There is something ironic here. The government of Iran is making trouble for many nations and people in this world, what with its nuclear program, sponsorship of international terrorism, dealings with North Korea, and other bills too lengthy to describe just now.

But for all of the trouble that many people in the West (and elsewhere, truth be told) think is being caused by the government of Iran, here is an Iranian among the most direct and sincere in identifying and proposing the elements of a solution to a profound energy dilemma.

Until we meet again…

Byron W. King

Useful links about the Decline of Peak Oil:

Energy Bulletin The debate over when oil will peak globally (or if it already has), plus what our society can do to survive.

Life After the Oil Crash What happens next after Peak Oil? It’s the end of the modern, civilized world as we know it.

Peak Oil Understanding what Peak Oil is exactly, and what the ensuing crisis means for investors and everyday consumers.

Wikipedia An article explaining the Hubbert Peak Theory and future preditions for the production of oil.

Yahoo! Finance Oil and gas drilling and exploration, plus an up-to-date look at how oil and oil-related stocks are doing on Wall Street.


The Daily Reckoning