Today's subject is the re****t and the press conference which has just
occurred to launch the re****t by The Energy Watch Group, which is
called Crude Oil Supply Outlook. It has some fairly stark findings,
and given that this has, to some extent, the imprimatur of the German
government, it seems quite an im****tant and possibly landmark moment.
So that's what we're going to discuss. Chris, can you first give us a
brief outline of what was in the re****t.
Chris Skrebowski: Certainly. The re****t was-- effectively what's been
happening is Hans-Josef Fell, a member of the German Parliament since
1998, and speaker of the Energy and Technology Policy for the
Parliamentary Party Alliance. He was very involved in things like feed-
in tariffs. He's involved in making sure that the world of the
Bundestag, in this case, knows what it's talking about; and various
re****ts have been commissioned, the latest of which is this one on the
crude supply, crude oil supply outlook. The rather stark message that
came from this, was that oil production has probably peaked now, and
will decline steadily from here on out at about 3% a year, which then
means that we have, looking forward, some pretty dramatic declines. If
you think that in 2006, crude and liquid production was about 81
million barrels a day, what the re****t is projecting is that it will
fall to about 58 by 2020. Now this contrasts with the IEA's hope that
it'll be at 105 at that point. So that's a spectacular difference;
even more spectacular by 2030 when the IEA was hoping the world would
be fueled with 116 million barrels a day, the re****t sees the
production down to 39 million barrels a day. It's therefore not
difficult to see the sort of economic stresses and strains that this
will produce in the world economy.
Julian Darley: This is at least a dramatic a re****t as has been
released, I think, by any official or semi-official organ. Why should
people take this seriously?
Chris Skrebowski: I think when you look at it and it's publically
available through the energywatchgroup.org website, you will see that
it's a very carefully done piece of work, for they've developed a
methodology that's basically a production based methodology. But
they've also looked at the sort of underlying reserves, and they've
come up with figures. They've contrasted these with the sort of
industry data-base figures from IHS Energy. It's a pretty solid piece
of work. There's a mildly amusing piece of cir***stantial
confirmation, which is that the legendary Texan oil man, T. Boone
Pickens has made not millions, but billions betting against the oil
industry conventional wisdom, has just announced that he thinks we
have hit peak oil and that it will go down pretty rapidly from here on
in. So, I wouldn't wish to bet against Mr. Pickens. He's got a good
track record for actually getting it right, and we have a very careful
re****t, very thorough re****t, which seems to be saying the same thing.
So, yes, it's fairly unnerving that this may be the start of a very
major social and economic upheaval.
Julian Darley: In fact, if anybody listening to Global Public Media
wants to go and hear Mr. Pickens go and make that pronouncement, I was
actually two feet from him when I asked him the very question, when he
thought oil was going to peak. That's available in audio/video on
Global Public Media later on today, the 22nd of October, 2007. Looking
at the re****t, they aren't all pessimistic compared to the sort of
conventional wisdom. There are a few nations, a few oil provinces,
where they actually think that matters are going to go better, certain
one can give sort of a balanced view of this. Can you mention where
those might be?
Chris Skrebowski: Yes, certainly. This is where they compare their
review on remaining reserves with the view of what is often referred
to as the industry database, the IHS database. Now, the first point
here is on the Middle East, they have, in effect, removed all the
uplift that we saw in the 1980s after the nationalizations, when
literally all the Middle East countries revised their reserves
upwards. Many people felt it was just a sort of internal OPEC
competition, and these revisions didn't necessarily have much
underlying them in the way of oil. So, certainly in that area they've
taken it down by a rather spectacular 300 billion barrels. About 300
billion barrels is basically five North Seas, five North Seas gone
missing, if you like. In contrast, when they look at the African
countries, they are somewhat more optimistic on Angola and Libya and
Nigeria, and just slightly more optimistic on Algiers. So they've
certainly worked their numbers carefully all the way through, and come
to their own conclusions.
Julian Darley: Another place where they seem to be, possibly unduly
optimistic, is in the tar sands, which they show as reaching on the
order of 4 million barrels a day by 2030 and no sign of any decline in
that either, beyond that, but you get the feeling that there doesn't
seem to be a shoulder in there. What do you make of that given that we
know there are, in fact, manifest problems in the Athabasca region,
which is where the concentration of tar sands is?
Chris Skrebowski: Yes, this does seem a fairly optimistic construction
because, if you like, there are two or three challenges in the tar
sands, which may or may not be soluble and one which I regard as much
more fundamental. The ones that may be soluble are the availability of
water, the availability of gas or alternative means of heating the tar
sands to make them mobile; and finally the, how rigorously or
otherwise you enforce environmental controls on the tar sands
operation. At least in theory, those three could be brought into line.
The one that's much more difficult to cope with is the idea that the
tar sands are variable in the richness, the bitumen, and basically
they vary from the sort of 12% bitumen in the central area, which is
where most of the activity is going on at the moment, and then as you
get further out in all directions, the quality of the oil, if you
like, falls off. There's a sort of step change where it drops down to
about sort of 8%. Very roughly speaking, current expectations are that
by about 2015, you will have worked out the richer areas, and you'll
be moving into these lower, poor grade. Now the challenge here, of
course, is whether you can still get the whole processing to add up,
given that energy and energy out equation isn't terribly good, even at
12% oil. So whether it will add up at 8% oil is a mute point, so they
are taking the fairly optimistic view that all these standard
challenges can be solved, and that the economics of working a leaner
ore can also be overcome.
Julian Darley: Are you foreseeing, in fact, an earlier peak for tar
sands' output?
Chris Skrebowski: I think, I think at this stage it is just too early
to tell; but, it is a plausible and ultimately a respectable argument
to say that if you can't get the economics to add up well as the ores
become leaner, you probably would have a tar sands peak, and that it
would decline.
Julian Darley: And the tar sands peak, not in 50 years' time, but
rather sooner?
Chris Skrebowski: Yes, it would be in the 2015, 2020 era.
Julian Darley: Which is dramatically earlier than almost anybody puts
it at.
Chris Skrebowski: Again, what you see is that we do know, in general
terms, that we always will get leaner. We have some idea of when the
might start having a discontinuity; but, we can't actually put our
hands on our heart and say we definitely know that, because we will
learn more about the tar sand as it's exploited, as it's dug up or
processed by the processes such as the SAGD.
Julian Darley: Yes. Taken together with the beginning precipitate
declines in Mexico, this seems to pose possibly more dramatic problems
even sooner for North America than even some of the most, say,
realistic or pessimistic analysts have suggested.
Chris Skrebowski: Yes, I think that's true. I mean, America is now
im****ting 60, nearly 60% of its requirement, and its very dependant
for that supply on three key suppliers, all of whom have questions
round them. Venezuela's becoming a questionable supplier as its
production drifts down. Mexico is becoming a questionable as its
production goes into a quite rapid decline phase about the immediate
ability to turn that round. Even Canada, which has been, if you like,
the most reliable supplier, has some questions as you go further out
and wonder whether the tar sands will ramp up in the way people hope,
fully offsetting the declines in Canadian conventional production and
advancing over-all Canadian production.
Julian Darley: One of the other interesting graphs that they show in
their executive summary and in the full re****t is the situation for,
what I call, the international oil companies, the IOCs. The outlook is
not looking terribly healthy for them in general.
Chris Skrebowski: No, no. This is a graph that, I think, will come as
an unpleasant surprise to a large number of people because what this
very clearly demonstrates is that by the first quarter of this year
the big international oil companies were actually producing little
more than they had been producing ten years earlier, in the first
quarter of 1997. They did improve the production in intervening
periods, and very roughly it looks as though they got to their highest
level, maybe their peak, in the first quarter of 2004. The other thing
that's very clear from this graph is that the mergers between the
various companies have not led to any great synergies in terms of
expanding production. If you merge Chevron's production and Texaco's
production, then it goes into Chevron-Texaco production, it's
basically the sum of the two earlier bids. Similarly with Total Fina
and Elf; BP and Amoco and ARCO, and Mobile and Exxon. Quite
remarkable.
Julian Darley: Have you heard of any reaction from the large oil
companies to this yet?
Chris Skrebowski: Not so far, but then, literally, the re****t has only
been sort of publicly launched today, and I'm not sure whether the
companies would seek to comment on it or whether they would do one of
those, 'I think we'll ignore this' type of approaches.
Julian Darley: Were they present at the press conference, and what
kind of turn-out was there?
Chris Skrebowski: There was quite a good turn-out, but it was mainly
the specialist's magazines and some of the sort of interest groups,
like Greenpeace, and people like the ecologists. Nothing wrong with
that, but a bit disappointing that some of the main-stream media, and
some of the more tightly focused and informed oil commentators weren't
there.
Julian Darley: What was the reaction? Was there any questioning of the
re****t?
Chris Skrebowski: Yes, indeed, there was. As was perhaps predictable,
there was some question as to whether this re****t was in fact being
alarmist, whether it was being unnecessarily stark; because, of
course, it's a tough message to take on board, and people don't like
sort of tough messages that are going to quite clearly change their
whole way of life. So I think there was a reluctance to accept that it
could be as stark as that.
Julian Darley: One of the main underlying points is that the decline
rate for oil provinces, or regions, is, in their estimations, showing
signs of and going to be rather faster, I think, than has generally
been assumed.
Chris Skrebowski: Yes. They have a number of graphs in which they
contrast their projections with the IA projections, and you see, even
where the IA is accepting that the province is in decline - say in
Europe - the Energy Watch Group is predicting rather steeper declines
than the IA is.
Julian Darley: It's certainly suggesting that Europe's going to have
even deeper problems round oil, as if they don't have enough with gas.
Chris Skrebowski: Yes. Absolutely no doubt about that.
Julian Darley: It may be one of the reasons why Germany has been the
country, in this case, to have sponsored this re****t; since it is the
highest im****ter, if I'm not mistaken, of both oil and gas, and is
heavily dependent on a large country to the east.
Chris Skrebowski: Oh yes, Russia's role as a key supplier into Germany
does, I think, make the Germans feel somewhat nervous; but then the
Germans have been taking action in a way that most other European
countries haven't. They've successfully raised, for example, the
amount of renewable energy in their generating mix very spectacularly
from 6.8% in 2002; I think it was, to right up to 14% in 2007. So
they're rather pleased with the way their feed-in tariffs have
actually worked, and they have really achieved at least some of their
goals in moving away from traditional hydro-carbon generation.
Julian Darley: Was there any discussion of a sentence near the end of
the summary re****t, which says, ' the world is at the beginning of a
structural change of its economic system.' Now, as a former economic
student, and also just returned from the ASPO Houston Conference,
where there was some mention by some very strong and established
figures that there may be a few economic difficulties down the line.
Was there any discussion of this? What do you make of that?
Chris Skrebowski: No, quite literally, no one discussed it. It was
almost as if that was too tough to talk about. Yes, that was quite
surprising, but maybe people were trying to get their heads round the
re****t as a re****t, before moving on to a conclusion, which clearly is
unattractive to us all, whether it's coming or not coming.
Julian Darley: You've been an oil industry analyst for a fair number
of decades now, with experience with BP and the Saudi Arabians,
amongst many others, and you've also been doing the seminal work on
the oil field's mega projects, which gives you a kind of special
insight into the likely future production. So what do you make of this
re****t? Do you think it's more or less right? Is it congruent with
your expectations?
Chris Skrebowski: Not quite, but I have to respect the fact that this
is a very comprehensive re****t. They've gone back to fundamental
sources, they've checked and they've come to their conclusions. My own
conclusion, which, if you like, if fairly dependant on information
that's publicly available, and I think this re****t actually had access
to some that's less publicly available. So my work, basically tells us
that if everyone does what they say they're going to do, and all the
things work as they are expected to - that's a pretty heroic
assumption - we could get out to about 2011, but no further. Now, what
that means is that you would find an envelope of where you could get
to, and then everything that goes wrong brings you back in time that
envelope. What the Energy Watch Group, in effect, is saying is there
are enough things that are going wrong, not working as people might
have hoped, to bring us all the way back to it being an immediate peak
now. And it's certainly true that if you look at a standard production
series, like the IEA production series, you find that we've been on
this sort of bumpy plateau since January or February 2005. That's
nearly 30 months that we've been sort of bumping along without
succeeding in getting the production significantly higher.
Julian Darley: If everything does go right, which, as you suggested,
doesn't appear to be the case, what is your outer limit for the number
of barrels per day that we might see?
Chris Skrebowski: Probably about 92 million barrels a day, and now
that of course is predicated on the idea of exactly what you count.
Here I'm counting all liquid, so that contrasts with an all liquid
number of about 85 at the moment, or 85 and a half. So what my
analysis is saying is that we've got another 5 to 7 million barrels a
day to come if everything works properly.
Julian Darley: That also strongly depends on what the underlying
depletion rate is, and for the world, what also really matters is what
the overall depletion rate - that which affects what ultimately goes
into the refineries and the petrochemical system, etc. There were
mediary re****ts that the Energy Watch re****t was suggesting 7% decline
rates, but looking through the re****t, there doesn't seem to be a
great deal of evidence for that. Can you say something about the
various decline rates which you've heard put forward, and what is your
own estimate for an overall decline rate?
Chris Skrebowski: Certainly. The rate that I'm using is 4%. I get to
4% sort of two or three ways. The latest IEA medium term re****t which
came out in July, the one that started saying there could be an energy
crunch by 2012, was, I think, the way the Financial Times put it, uses
the figure of 4.6% for non-OPEC production, and 3.2% for OPEC
production. If you sort of weight that by the production volumes,
gives you an overall 4%. I know that the 4% figure is being used,
certainly within sort of closed industry discussions, and we know that
there has been a re****t recently from one of the major consultants,
which talks about a rate 4.5% on a slightly different base number.
Whichever way you cut it, it looks as though the world needs to
produce about 3.3 million barrels a day increment each year just to
stand still, that's before you meet any incremental demands at all.
Mr. Pickens, when he was talking about peak being now, actually
mentioned a rather higher figure of 6%; because he didn't elaborate
exactly what it was 6% of, it's been difficult to directly compare it.
The idea that it's running at around 4%, 4.5%, works pretty well if
you think that if you go back to the 70s and 80s where the industry
would talk about sort of 2% decline rate by the end of the 90s, it was
talking about the 3% decline rate. We've seen a lot of countries move
into depletion, producing less each year than the year before. So to
have got it up to about 4% by now, on a gently rising trend, seems
fairly plausible. But the fact that it's plausible doesn't mean that
it's right. We can't rule out the possibility that this is one of
these series that's, in fact, escalating. It may be the mirror image
of the feature we see of countries where initially the decline rate
starts quite gently, then it picks up and it's a bit like a ski slope,
steep bit of the slope, and then finally you have a run out to a lower
level at the end. So if it's the mirror image of that, it could be
that this figure is escalating, that it's turning upwards, in which
case the sort of T. Boone Pickens view or the Energy Watch Group would
tend to be concerned. If it's the more gentle, progressive increment,
then you can relatively easily get it out to 2010 or 2012, but as the
point before starts really turning down. So unfortunately, the number
we don't really have a good handle on, is the key number, and we're
playing for quite big stakes here because obviously every one percent
is about 800 thousand barrels a day per year.
Julian Darley: What is the significance of 800 thousand barrels per
year?
Chris Skrebowski: Well, we worry about small changes in demand. Is US
demand slowing a bit? Are we going to lose a hundred or two hundred
thousand barrels a day? Is China squeezing out? Well then we're going
to gain one or two hundred. If the key number is really the depletion
number, where you're playing for 800 thousand barrels a day for every
one percent change and you really, probably can't be sure, but you're
necessarily within the last half percent or the last 400 thousand
barrels a day, that really is going to drown out the other effects.
Julian Darley: Just to be clear, there is a difference between
depletion and decline. If you've got a depletion, underlying depletion
rate of 4%, if you're bringing on lots more, then you may have no
decline or only a slight decline. What ultimately hits the world is,
as it were in a sort of pocket book of the refinery or the wallet of
the refinery, is the overall decline rate. Are you suggesting that's
4% or is it less?
Chris Skrebowski: No, that's now up to 4%.
Julian Darley: So the overall decline rate is up to 4%.
Chris Skrebowski: Yep. So every year, unless you bring on, as I say,
3.3 million barrels a day, you will start going backwards.
Julian Darley: So to clarify, what you're talking about then is an
overall decline rate, for the world, of about 4%. That's what actually
goes into the refineries and the petrochemical system.
Chris Skrebowski: Yes. That's right. So if we're losing that each year
to depletion, unless we can make it up, our availability is going to
go down. Now what we actually want to do is cover the depletion and
have a bit more on top of that to meet incremental demands, because at
the moment, demand continues to expand.
Julian Darley: You've recently been re-examining some of the oil field
mega-projects work, I believe, and you've noticed something about 2010
and thereafter.
Chris Skrebowski: Yes indeed. The oil business is pretty slow-moving,
which is why you can do any of this sort of analysis at all. Now, at
the moment, the approximate time difference between when you hear of a
major discovery of oil, or when it starts flowing oil, is about six
and a half years. Or, if you like, from the point when someone
initiates a big project, to when it starts flowing is typically some
five years plus, and tending to get longer as delays ac***ulate in the
system. Now if we look at things like the OPEC website, we find that
there's no declared projects over 2010, beyond 2010; there's a couple
in Iran and that's it. Even if they know about it, if they haven't
started appointing contractors, if they haven't started doing the
engineering, one thing and another, then we're looking at the far side
of 2012, because they will need four years from now and we're not that
far off from being in 2008. We're already seeing sort of holes appear
where there should be a project. If we look at the sort of non-OPEC
projects coming up, they really thin off after about 2012, but we
should be hearing about projects in 2013, we should probably be
hearing about projects in 2014. There's quite literally only a couple
that we know of.
Julian Darley: So to finish up with, and to tie this together, when do
you think that you would feel that you could say that, for instance,
the Energy Watch Group were, in fact, right about this relatively
early peak and quite stark decline; or be more secure that you're
somewhat rosier, but still not very comforting to sort of business as
usual, estimates will be correct? What kind of signals and what kind
of timing do you think will help you to be sure?
Chris Skrebowski: Well I think by the end of the first quarter of
2008, we will have two or three key pieces of information. We will
first of all have found out how much OPEC is prepared to turn up its
production, how much it's able to turn up its production, and we will
also find out whether the Saudi projects are coming through as planned
and expected or not. We will probably have got some indication of
whether OPEC is still prepared to invest heavily to expand production,
or whether it is starting to take a different viewpoint. The final
piece of information we will have had is just how much non-OPEC
production came on stream in 2007, and then that gives us at least
some sort of handle on the ways in which we can expect our future
projects to come through, given that in the non-OPEC world there's
every incentive to bring them on stream as quickly as you can. So with
those extra bits of information, I think I'd have quite a lot of
confidence in saying that we've either got to peak or we've still got
a little bit more to come.
Julian Darley: So not many months to wait?
Chris Skrebowski: Not many months to wait.
Julian Darley: Thank you very much indeed. Chris Skrebowski, editor of
the UK's Petroleum Review. This is Julian Darley for Global Public
Media,
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