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2006 Boston ASPO: Peak Oil

FOR ME, it was old-home week in Boston. My previous articles about the 2006 ASPO-USA meeting in Boston, published Oct. 30 and Nov. 1, 2006, in Whiskey & Gunpowder, provided an overview of the topics of global warming and renewable energy sources. In this article, I will outline some thoughts on Peak Oil and describe some of the ASPO discussions on the subject. Please be forewarned that there was a lot of red meat on the topic of Peak Oil, so this article is just one of a number that I will write.

Editor Greg likes to call me the Agora Financial “Peak Oil correspondent.” That is just fine with me. I have been a “Peak Oil guy” for something like 30 years, starting with meeting the legendary “father of Peak Oil,” M. King Hubbert, when he gave a rather poorly attended talk at Harvard back in 1977. Hubbert was a visiting instructor at MIT, and had come down Massachusetts Avenue to conduct a “lunchtime seminar” at the Harvard Geology Department. There were maybe a dozen of us geology students in the room with him. I remember Hubbert standing in front of the blackboard, slapping his pointer against his charts and discussing, in an animated tone of voice, the inevitable and inexorable notion of depletion, by field, by basin, by region, and by nation.

“You cannot produce what you have not discovered” is one of Hubbert’s comments that comes to mind. “And the big discoveries in the U.S. stopped in the 1950s,” he said. “The only exception has been Prudhoe Bay, Alaska, which is a very remote and expensive place in which to operate.”

Hubbert continued with his talk, saying, “I think that you can apply this predictive methodology to the whole world, but the data are simply not there just now. Eventually, our ability to pump oil from the ground will encounter the material-energy system of the planet. We will have to go to the ends of the Earth, and spend economic fortunes, to find and extract oil. So our society should be planning now for what to do when oil is no longer available or affordable in the ways that the past couple of generations have come to expect.” And so, dear readers, perhaps you can understand why the Boston ASPO conference was like old-home week for me. Yes, sometimes you can go back.

A Bit More on Peak Oil

If you will permit me to digress just a bit more, dear readers, it was not long afterward, in 1978, that I was working as a geologist in west Texas for the former Gulf Oil Co., long since absorbed by Chevron. There, at Gulf, I rapidly became disabused of the idea that I was in the “oil business.” It is much more accurate to say that back then, we were in the “saltwater business.” Gulf’s many hundreds of wells in the North Ward Estes field, about 40 miles west of Odessa, Texas, collectively lifted hundreds of thousands of barrels per day of salt brine from wells drilled into the Permian Basin, with an oil cut of maybe 15-20% or so. We would pump the fluid into devices called “separators” which, as you can probably figure out, separated the oil from the water. We would, of course, keep the oil and reinject the water back into the formations in a massive water-flood operation. This kept up the pressures down in the holes.

Our daily effort, I learned, was to extract oil from old fields that were in their inevitable phase of irreversible decline. Hubbert redux. Sure, we geologists came up with drilling proposals for offset wells, in an effort to expand the proven reserves of the old fields and to keep up production. And it worked much of the time. But we were just expanding on discoveries that had been made decades earlier. Nothing that we were doing was contradictory to Hubbert’s thesis.

We geologists also worked on exploration concepts, trying to figure out where else in the Permian Basis some more of that oil might be hiding, and I assure you that it could hide really well. As with many things in life, some of our drilling prospects were winners, and some were not. But sitting in the drafting room and drawing subsurface maps, or squinting at the well logs in the log library, or kicking the iron out on the drilling rigs helped me to develop what I consider an informed perspective on the effort to extract oil and gas from the ground.

Nothing Quite Like Drilling for Oil

“If you are going to take Vienna,” said Napoleon to his commanders, “then take Vienna!” And if you are going to be in the oil biz, then drill for oil! There is nothing quite like listening to the squeal of the drill pipe as the rock bit transitions from one pressure zone to another. There is nothing quite like watching the “weight-on-bit” reading or hawking the “geolograph” readings to make the call on the top of your target formation. “Hold your weight and circulate for cuttings,” you order, knowing that it will cost the company a small fortune in the day rate, just because you want to look at some specks of rock covered with drilling mud. There is nothing quite like the sense of trepidation you get when you order the drilling crew to pull the drill string, and send down the coring bit, and then watch that core sizzle and boil with dissolved gas when you bring it back up to the drill deck.

There is nothing quite like a drill stem test, when you can hear that oil and gas just rush into the pipe from thousands of feet below. There is nothing quite like reading the wireline logs, or watching the casing go down the hole, or smelling fresh cement as it is pumped down to complete the well. And there is nothing quite like feeling the vibration of the explosive charges as they perforate the casing, or the small earthquake beneath your boots as the fracturing job gets completed. And there is nothing quite like it when that oil comes up the pipe for the first time and it flows into the gathering pipelines and you can watch the gauges as they measure the volumes. There is nothing quite like the feeling of, as the saying goes, “the conquest of the rock.” When your well comes in, you are, for one brief moment, the Man.

And in short, dear readers, when it comes to making oil wells, there is nothing quite like doing it to teach you how to do it. If you don’t quite get my drift, I am telling you this to share with you the sense of passion and need for knowledge and understanding that comes from exploring in an unknown and unforgiving regime of the world of ancient and buried rocks. And I am mentioning it also in order to offer a raw insult to people who say really, really crack-smoking dumb things like, “If the price goes up, we can just go out and drill more wells and find more oil.” Oh yeah, Gomer? If it is so easy, then why don’t you just go out and do it, Mr. Genius? And what the hell do you mean “we,” you skinny-legged white guy? Have you seen the demographics of the oil industry lately? You need to come downtown for a very rude surprise, pilgrim.

Forgive me for having to break the news if you are not among the initiated, but the oil business is a pretty hard and tricky occupation, and quite unforgiving of mediocrity or lack of attention to detail. And did I mention that it helps to be lucky? We all, dear readers, are very fortunate to live in a world where oil (and of course, natural gas) are relatively available and affordable. Sometimes, I really don’t know how our modern industrial world has accomplished what it has achieved in the realm of extracting oil and making it so widely, ubiquitously available, and I have been part of the cadre that has actually done it. It still blows my mind.

A Pass/Fail Intelligence Test

I will, as promised, discuss the details of the ASPO conference. But what prompted my digression above was a recent comment in a newsletter that crossed my desk. The author wrote an article entitled “Peak Oil: A Pass/Fail Intelligence Test,” in which he argued:

“You know about peak oil.

“That’s the idea that the world is running out of oil, that the price is going sky-high as the global supply of oil shrinks to nothing.

” It’s going to happen so fast, say true believers, that we won’t have time to develop new alternatives. We’ll be caught with our pants down, and the world will plunge into chaos.

“C. J. Campbell, geologist and author of The Coming Oil Crisis, says, ‘We have come to the end of the first half of the Oil Age.’ As if the Stone Age ended because we ran out of stones.

“Peak oil theory is wrong because it demands a repeal of the laws of economics, the simple dynamics of supply and demand. It also endows prognosticators with the ability to see the future, an ability, unfortunately, which no one actually possesses. Finally, like all Malthusian theories, it ignores the fact that every human mouth comes with one human brain attached (and at no extra charge, I might add)…

“Peak oil, like every apocalyptic depletion argument, is one of life’s little intelligence tests. If you believe it, you’re stupid and you fail. If you know it’s crap, you’re smart enough to pass. It’s like Y2K. If you moved your family to the hinterlands of Arkansas and predicted violence in the streets, you failed that little test. If you ignored it, you passed.”

Stunning and Willful Ignorance

Wow. Where should I start with this one? The writer appears to know his own opinions. But he does not seem to know, as the saying goes, “crap” about the trends going on within the oil and gas business. This Peak Oil critic displays a rather stunning, if not willful, ignorance of the very basics of the oil business. So let me be charitable and opine that it is a shame that the author of the words set forth above did not buy an airline ticket and attend the Boston ASPO conference, where he might have learned a few things. (See? I told you that I would write about the ASPO conference.)

“You cannot produce what you have not discovered,” said M. King Hubbert. And “Our ignorance is not so vast,” he said on another occasion, “as our failure to use what we know.”

Ominous Trends in Exploration and Production

At the ASPO conference, the one-and-only Matthew Simmons, a national treasure who has been part of the financial heart of the oil biz for nearly 40 years, noted the utterly ominous trends in world exploration and production for both oil and natural gas. “Too many regions of the oil-producing world are now in decline,” he said. Simmons made note of several former oil exporters, such as Britain and Indonesia, which were formerly oil exporters but are now net oil importers. And Simmons discussed at length the precarious state of future oil production in Saudi Arabia, the subject of his 2005 book Twilight in the Desert. Of the many messages that he received about the book, from a small army of people who are highly knowledgeable in the field of the oil business, “about 99% were positive,” said Simmons. As a student of the world’s oil and gas production data, Simmons warned of the “danger of relying upon conventional energy wisdom.” He noted that it is “rare to find any good news” in current energy production data.

“The fall of the Soviet Union (in 1991),” said Simmons in a very interesting aside, “and the rapid elimination of 5 million barrels per day of demand from that nation almost overnight bought the world 15 years of time.” But instead of using those 15 years to encourage oil savings and energy efficiency and promoting transition to other energy sources, world energy demand simply burned up what seemed at the time to be “cheap oil.” So during the 1990s, oil demand began to grow in China, India, and elsewhere in the world, and this now accelerating demand will continue to grow until constraints on supply abruptly limit that growth. In the process, according to Simmons, there will be wild fluctuations in pricing that will “destroy pricing signals.”

“Energy optimists are adamant that Peak Oil fears are wrong,” said Simmons. But even dramatically higher prices for oil and gas will not necessarily “grow reserves,” he said. According to Simmons, the limiting factor for future production, in the face of accelerating depletion and extraction decline curves, is drilling new wells. But on a worldwide basis, drilling rig capacity is almost entirely utilized. That is, there are virtually no “spare” rigs to put into production, and new capacity will not be available in significant quantity for many years. So whatever is out there is what the world’s drilling industry has to work with for the foreseeable future. And more and more drilling is “discovering” less and less new oil and gas.

Couple this shortage of rigs with chronic shortages, on a worldwide basis, of industrial capacity to manufacture the necessary goods for drilling new wells, such as bits, tubular goods, and related drilling and production equipment. This is driving prices for these goods upward on a steep curve, and in turn inflating the estimated costs of almost all major energy projects either on the drawing boards or under construction. And finally, throw into the mix of problems a profound worldwide shortage of personnel, from welders to drillers, geologists to petroleum engineers. Within the Western oil and gas industry, the ages of skilled personnel tend to be 50 and up, with retirement looming for many well within the next decade. The replacement cadre is almost entirely under the age of about 30 or so, with not many years of experience under their collective belt.

Back to that “Peak Oil Pass/Fail Intelligence Test”

So the skeptics (see the example that I cited above) are quite in error when they  write  things like, “Peak Oil theory is wrong because it demands a repeal of the laws of economics, the simple dynamics of supply and demand. It also endows prognosticators with the ability to see the future, an ability, unfortunately, which no one actually possesses.”

As Hubbert said, “Our ignorance is not so vast as our failure to use what we know.” And as Matt Simmons makes perfectly clear, he has taken Hubbert’s advice to heart. Simply by reviewing the data that are available from the world oil and gas industry it is more than possible to “see the future.” The future, in fact, is carved in stone, and I am not making a geology pun.

The current wells that produce oil and gas are up and running, but they are depleting and (most of them) declining with each passing moment of extraction. The wells that will be producing oil and gas in the future, certainly for the next five-10 years, and the fields and the trends, and the basins and the geologic provinces, have all been identified. The rigs are out there, under contract. The technology is what it is. The people, the equipment, the supplies are all pretty much who and what and where they are. Prices and policies might change some things at the margins of exploration and production, but what the oil industry is going to do in the next several years is entirely limited by what can possibly be done with the resources at hand.

And the Peak Oil critic whom I quoted earlier also opined that Peak Oil repeals the laws of economics. To paraphrase a former U.S. president, it really depends upon which “laws” you are talking about, but actually, that is not such a bad idea. I will discuss this concept much more in a future article, but the ASPO conference offered some remarkable economic analysis of the concept of energy return on energy investment (EROI). Here is the short version, with more to come in a future article.

EROI, Briefly

Modern economic theory severely discounts the inherent value of an energy-dense liquid like petroleum. Modern economics is leveraged upon the ability of societal units and individuals to extract and utilize what are, in historical context, “godlike” amounts of energy from humble, yet depleting, rock oil. That is, modern economic theory utterly disregards the material energy limits of the natural world (OK, this is a Hubbert concept). And modern economics also turns people into little more than “consumers,” to the great detriment of mankind (another discussion entirely).

Think about it. Is the economic progress of the past two centuries or so entirely a function of mankind “discovering” the ideas of free market economics? Or did, perhaps, the availability of cheap and accessible energy supplies in the form of hydrocarbon fuels have something to do with it? If the latter, then what happens when the hydrocarbon fuels deplete?

More specifically, the point is that the energy content inherent in oil currently provides the industrialized world with an EROI of 25-to-100 (this is a general view of the EROI of most commercial oil wells throughout the oil-producing era). Without this highly favorable EROI, mankind would still be probably 90% farmers, living a squalid existence at the edge of most natural limits and shivering in the cold of winter. (What did the world look like in, say, 1859, pre-Col. Drake?) Absent oil and its outstanding EROI, mankind sure could not afford the likes of modern Big Government, Big Military, Big Finance, and all the other Big Stuff (“BS” for short) that it currently supports by burning oil.

And everything that I have just told you merely scratches the surface of the ideas and themes of the Boston ASPO conference. I am sorry if you missed it, but I will do my best to convey and explain what went on. Thank you all for reading Whiskey & Gunpowder. And stay tuned.

Until we meet again…
Byron W. King

Here are some other Whiskey articles about Peak Oil:

Hubbert’s Peak Defense Department by Byron King
“What will the world look like on the backside of Hubbert’s Peak? What you see depends upon where you stand. If you happen to stand in the Pentagon, the headquarters of the U.S. Department of Defense, the view is rather sobering…”

Planning, Policy, Strategy and Energy, Part IIby Byron King
“…I am discussing all of this because the United States needs to start thinking, and thinking very hard, about developing a ‘national energy strategy’ in a pure sense. In Part I and in the preceding paragraphs here, I began to refer to policy and strategy in the context of Clausewitz and of warfighting…”

Planning Policy Strategy and Energy, Part III by Byron King
“…What is the basic fallback principle to which Americans tend to revert when confronted with hard questions of industrial policy? It is that ‘free markets’ are generally better at organizing economic activity for wealth and profit and promoting general progress than are government plans? The idea of ‘government planning’ is anathema to most Americans…”

Letters to the Editor: Planning, Policy, Strategy and Energy by Byron King
“…There are all of the makings of a political upheaval in the coming Peak Oil tsunami. There are even a few candidates running for office on a “Peak Oil” style of platform. You will probably read about it here in Whiskey and Gunpowder, because we are always ahead of the biggest waves. Another story for another time. Back to Jim’s e-mail…”

Useful links about Peak Oil:

DIE OFF Synopsis of the global energy situation over the last few decades…and what to expect in the decades ahead

Hubbert Peak Data, analysis and recommendations regarding the upcoming peak in the rate of global oil extraction

Impending World Oil Shortage Analysis of Dr. Hubbert’s studies and choices people must make about energy

Wikipedia The Internet’s free encyclopedia on the Hubbert Peak Theory aka Peak Oil

The Daily Reckoning