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Daniel L. Davis is a field grade officer in the United States Army, having served four combat deployments (Desert Storm, Operation Iraqi Freedom, and Afghanistan twice). He has a master’s degree in International Relations from Troy University. He has been writing on oil and energy issues in major national publications since 2007, but has been writing on foreign, diplomatic, and military affairs for over two decades. His work has been published in the Washington Times, Armed Forces Journal, Dallas Morning News, Defense News, Philadelphia Inquirer, Army Times and other publications. He has appeared on CNN, Fox News, PBS News Hour, NPR, Democracy Now, and other broadcasting organizations on defense-related subjects. Davis is also an advisory board member for the Association for the Study of Peak Oil and Gas, United States (ASPO-USA) and was awarded the Ridenhour Prize for Truth Telling in 2012. [See link at bottom to full report]

Introduction

Since January 2012, at least three prominent energy authorities have heralded an “oil revolution” and “energy independence” in the United States that a thorough analysis suggests is built on flawed assumptions that renders their conclusions unsupportable. These three separate yet corroborative reports, released by Pulitzer Prize-winner Daniel Yergin, Harvard University’s Belfer Center for Science and International Affairs, and the US Energy Information Administration (EIA), have predicted that North America has the potential to become the “new Middle East” of oil and that the concept of American energy independence is a legitimate possibility. However, a rigorous analysis of these arguments reveals critical, foundational flaws in their conclusions. Moreover, evidence, logic, and observed oil field performance strongly suggest that the world in general may be unable to meet its crude oil needs at some point between now and 2017, though possibly as early as next year.

To many, it is inconceivable that these reports could be wrong – particularly as the list includes the industry’s best-known analyst plus the EIA and Harvard University – and thus are encouraged by the prospect of an energy-secure America. The projections these studies offer fail to properly consider several critical factors and dismiss some of the more significant problems involved in future oil production.
This paper examines the arguments offered by these three sources in detail, including several major articles and Congressional testimony given by the Chairman of Cambridge Energy Research Associates (CERA), Daniel Yergin; a June 2012 report written by former Italian oil executive Leonardo Maugeri through Harvard University; and the June 2012 release of the EIA’s Annual Energy Outlook 2012. The first section deconstructs the arguments presented by each author, analyzing the fundamental underpinnings of each message, and compares them with basic data and alternative analysis. In particular, the piece examines one of the main sources of optimism cited by all three sources: the Bakken “tight oil” play in North Dakota.

The second section explores several fundamentals of oil production that the three sources fail to cover. In order to understand how the legitimate increase in production from the Bakken contributes to the overall energy mix in the United States, it is crucial to concurrently examine several other components of oil production. The paper looks at global production in terms of historical performance as well as estimated future production.

Next, it examines consumption patterns in oil exporting countries and OECD countries, with a focus on expanding patterns in China and India (which directly affects the amount of oil globally available for export). It then considers the economic implications of the findings. Finally, this paper outlines the flawed track record of past projections made by many of the aforementioned organizations.

The bottom line: Those who contend the US is on the cusp of energy independence have relied on incomplete, selective, and in some cases unsubstantiated evidence on which to base their projections. They have failed to account for a measurable and considerable decline in the amount of oil globally available for export; they have significantly understated observable declines in production from mature fields (not even mentioning that since 2005, six former oil exporting nations have gone into net importer status); and have failed to examine political realities in the remaining oil exporting countries which may adversely affect future production levels.

Should the US Administration, Congress, and other leaders base policies on these flawed studies, the economic and national security consequences to the United States could be severe.

Why These Flaws Matter

A common theme among the many optimistic reports and studies is that there are massive amounts of petroleum resources presumed to exist throughout the world. These estimates range from a low in the 2 trillion range to as many as 9 trillion barrels of oil beneath the ground. This paper does not argue for one figure over another, but shares the view there are likely trillions of barrels of oil and its equivalent under the earth. But to what extent does this treasure trove of resource matter in terms of rates of oil production in the near term (which this paper defines as the next five years)?

Long-term projections of oil production capacity and knowing the extent of oil resources and reserves are necessary and useful. However, for this generation and its ability to emerge from the current global economic recession, a more realistic estimate for how much oil may be produced in the next five years is of far greater significance than knowing how much exists in total and may someday be produced. “Possibilities” will not fill American gas tanks. Based on an analysis of the key factors necessary to produce oil to scale, it is likely neither the world nor the United States will be able to produce the amount of crude oil necessary to meet current demand, let alone to enable economic growth, over the next five years.

If the United States bases its future economic and national security decisions on the belief that energy independence by 2020 is possible, we may make decisions in the near future that will greatly complicate what will already be a precarious situation. Taking a rational view of the situation as it genuinely exists, however, may help us more effectively navigate a future of oil shocks and economic turmoil.

You can read the full report at this link.

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BP “did not have the tools” to contain a deep-water oil leak, as they now admit. Their failure with that risk must now raise profound questions about how they handle other risks, in particular the threat that global oil production will fall prematurely, ambushing an oil-addicted world economy. That risk, “peak oil” as it is known, worries growing numbers of people, not least in and around the oil industry. But BP’s approach to it, until now, has been to pour scorn on the worriers. The company is a cheerleader in the global oil industry’s effort to persuade society not to be concerned about peak oil. (more…)

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« Public writer Laura Jones made a cautionary argument for reason in a 1997 essay:

In 1798, Thomas Malthus predicted in An Essay on Population that the world would run out of food. In 1972 Limits to Growth, published by the Club of Rome, predicted that the world will run out of gold in 1981, mercury in 1985, tin by 1987, zinc by 1990, petroleum by 1992, and copper, lead and natural gas by 1993… These predictions were irresponsible today as they were in 1798 (and 1972). Why ? Because the authors ignore the powerful incentives that markets provide. »[1] (more…)

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The debate on the realities of both climate change and Peak Oil has moved from ‘are they real?’ to questions concerning timing, magnitude and impact. At the same time, expanding research in ‘temporal discounting’ in economics (called ‘impulsivity’ in psychology), is shedding light on how steeply we value the present over the future, a trait that has ancient origins. Knowing this tendency, how can we expect factual updates on peak oil and climate change to behaviorally compete with Starbucks, sex, slot machines, and ski trips? (more…)

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Chris Skrebowski responds to CERA reportde bunking Peak Oil ‘Theory’

On November 10th 2006 Cambridge Energy Research Associates (CERA) published a report entitled

Why the Peak Oil Theory Falls Down: Myths, Legends, and the Future of Oil Resources

authored by Peter M. Jackson, Director of Oil Industry Activity

“Regarding the “peak oil” theory, CERA’s view, based on two decades of systematic research, including CERA databases and those of IHS (the largest proprietary databases in the world on oil production and resources), sees no evidence of a peak in oil production before 2030, with global production eventually following an undulating plateau for one or more decades before declining slowly. Above ground factors will play the major role in dictating the end of the age of oil.”

A press release went out shortly after on November 14th

Peak Oil Theory – “World Running Out of Oil Soon” – Is Faulty; Could Distort Policy & Energy Debate

“Correct Model for Post-2030 Oil Supply is Undulating Plateau”

“In contrast to a widely discussed theory that world oil production will soon reach a peak and go into sharp decline, a new analysis of the subject by Cambridge Energy Research Associates (CERA) finds that the remaining global oil resource base is actually 3.74 trillion barrels — three times as large as the 1.2 trillion barrels estimated by the theory’s proponents — and that the “peak oil” argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future.”

In an open letter published today (December 22nd 2006), Chris Skrebowski, Editor Petroleum Review, Energy Institute, responds.
Dear Mr Jackson,

I was surprised and somewhat saddened to read CERA’s curious attack on the concept of Peak Oil and the implicit attack on the Peak Oil community in your recent press release and report ‘Why the “Peak Oil” Theory Falls Down – Myths, Legends, and the Future of Oil Resources’.

Surprised because it appeared more or less at the same time as the IEA’s latest World Market report (WEO 2006) was announcing the IEA’s view that non-Opec oil production will peak by the middle of the next decade. Saddened because I had thought we were getting away from the sort of intemperate dismissals that have in the past been feature of the debate about Peak Oil.

In the fourth paragraph of your report you note:-

‘This is a very important debate, and as such it deserves a rational and measured discourse. We respect the urgency and seriousness with which some with whom we disagree put their case. Sometimes, however, the debate gets quite polemical. We wish that this debate could be approached in a more rational and thoughtful manner, buttressed by the recognition that this is (a) subject in which knowledge continues to evolve. A debate based on evidence and dialogue would be more constructive and would certainly better serve the importance of the discussion.’

Quite. So why issue a press release that was a polemic? Why confuse stocks and flows as though the two were interchangeable? Why list resources that are far from commercialisation as though they could be turned on in the morning? In short by not offering any indication of how quickly resources can be commercialised your report does little more than say there’s lots of resource so we must be all right. Would that life was so easy.

Now I have no way of knowing what pressures CERA is under nor do I know if this was a CERA initiative, instigated and funded by CERA, or a commissioned report. I know oil analysts, like supermodels, don’t leave their beds for less than extravagant piles of dollars. So who paid for this report is important if we are to take it as any more than special pleading.

Because CERA has chosen to use its resources and contacts to achieve maximum anti Peak Oil impact I have no embarrassment in seeking the widest possible circulation for this open letter.

In the report and press release you suggest that the Peak Oil community is somehow irresponsible in drawing attention to the challenge Peak oil could present. Now a ‘Be happy, don’t worry’ approach may be applicable in many areas of life. However, I find it hard to believe that the future of global oil and energy supplies is one of them. The maxim ‘Hope for the best, but prepare for the worst’ encapsulates what most people would call a responsible approach.

It is not even clear if CERA believes it own report as I am intrigued to see that CERA is now promoting a new multi-client survey ‘Dawn of a New Age’ Global Energy Scenarios for Strategic Decision Making—The Energy Future to 2030. In the promotional blurb we learn in the first paragraph that it is a multi-client study and such gems as ‘…….reflecting the heightened anxiety about the future of energy. The concern is not just over oil, but every aspect of the energy value chain; and the stakes are high for all participants in the global economy – but especially for senior executives and policy makers.’

Let me see if I’ve got this correct. For a public attack on Peak Oil activists’ concerns you claim there’s not an oil supply problem and we’re all irresponsible alarmists. But for senior executives and policy makers you have ‘undertaken the most comprehensive research project in our history’. Seems hard to believe the report’s conclusion is that there’s not a care in the world. Could it be that the real objection to the increasing publicity given to Peak Oil is that the senior executives and policy makers are losing control of the secret?

The heart of your contention that the Peak oil community is being alarmist is based around your table (above), which shows a potential resource of 4,821 Gb. I am afraid the table can only be described as a motley collection of the known, the unknown, the possible and the plain unlikely. More prosaically it appears to be a collection of apples and pears along with a couple of lemons. The left half of the table appears largely uncontroversial (for a more detailed critique and some questions see Appendix 1 below) while the right half, although technically possibly, is only of interest if it can be discovered, mobilised and marketed within a reasonable time period.

This in essence is the entire debate – can all the unfound and unproven resources be exploited quickly enough to more than offset the peaking and decline of the known and proven reserves? If not they simply guarantee that some sort of oil industry will be around for a long time but one that will be unable to meet the requirements currently placed on it. Now I am not sure that in your attack on Hubbert’s relevance and your determination to show how large oil resources could be that you realised that you appear to be repeating history. Let me explain. Unfortunately in that excellent history ‘The Prize’ written by your boss there is no mention or reference to Marion King Hubbert, Vincent McElvey or Mr Zapp, which is possibly why not enough people know the following story.

In his famous lecture in 1956 Hubbert with the aid of nothing more than his intellect, a pencil and some graph paper demonstrated that the prevailing cornucopian view of US oil supply was plain wrong and that a peak would occur around 1970. Instead of his views being received as a useful analysis he found himself being harassed and vilified. [Several in the contemporary Peak Oil community would probably observe that their own treatment has been little different].

Vincent McElvey was head of the USGS at this date and appears to have taken a very political view of his role and the necessity for the US to have large oil reserves to support a rosy output outlook (Does that sound familiar?). As a result he pressured the hapless Mr Zapp, who actually issued the USGS reserve estimates, to produce ever higher US reserve numbers. This process ended in near farce with a final US reserves estimate of 590 Gb (rather more than the entire Middle East) shortly before US production peaked and started its inexorable decline.

McElvey’s fate was to be sacked and discredited. The USGS then moved away from single figure assessments to the current system of probability based reserve/resource assessments.

It is worth noting that this has not fully solved the problem of politically driven reserve assessments. The USGS currently produces P95, P50 and P5 reserve numbers. More prosaically I refer to these as ‘what they know more or less for certain’, their ‘best guess’ and ‘the number for the politicians’. The Caspian provides a vivid example of the risk in providing a political number. At their last major study the USGS rated the Caspian reserves as 20Gb (P95), 60Gb (P50) but a staggering 200Gb (P5). Now the widely held contemporary view is that the Caspian is an exploration bust. In fact all the indications are that the USGS’ best guess (P50) was spot on. Their problem was all the publicity given to the political number (P5). It seems fair to conclude that low probability reserve numbers are just that — improbable.

It would seem that the rest of your table consists of reserves that are probably there but which can only be turned into production flows rather slowly.

Your figure of 118 Gb for Arctic reserves seems highly questionable. Apart from the known reserves in Alaska and northern Siberia, say 20-30 Gb, the remainder appears speculative. The USGS has their estimate of 47 Gb for Eastern Greenland. But, Eastern Greenland is ‘iceberg alley’ the source of the iceberg that sank the Titanic. Climate change is accelerating the rate of iceberg calving. There is no licensing, so far, and the offshore eastern Canada experience, where icebergs are much rarer, suggests that the cost of exploiting any Eastern Greenland resource would be prohibitive. The only exploration interest in Greenland, in Western Greenland has yet to make a commercial or even sub-commercial discovery.

The USGS’ record to date in terms of predicted discovery versus actual discovery is so far pretty poor. IHS Energy (your parent company) in their presentations has a slide which shows that only 17.5% of the anticipated discovery to 2025 has occurred in the 10 years to 2005. Now 17.5% discovered in 33% of the time is effectively just under half what the USGS were predicting. As if this wasn’t discouraging enough a new report from Wood Mackenzie and Fugro Robertson suggests that the Arctic is a gas province with at least 80% of the potential resource likely to be gas. As discovery in the entire Arctic over the last decade has been very low, can the Arctic regions add more than minimal liquids flows for the foreseeable future?

Enhanced oil recovery is a real phenomenon. The problem is the rate at which it occurs. Using average oilfield recovery rates in IHS presentations we can see that recovery increases by around 0.5%/year. Other estimates are lower. Using the IHS Energy figure of 0.5%/year would give an annual increment of 6.26 Gb/year (0.5% of 1,251 Gb). At that rate the 592 Gb you foresee would take 94.6 years to materialise.

Your heavy oil resource of 444 Gb seems large but not unreasonable. The challenge once again is to mobilise the resource at a useful rate. It has taken until now to get Canadian tar sand production to just over 1million b/d and until now to get Orinoco heavy oil production to 600,000 b/d. Of course these volumes can be multiplied many times over but how quickly? Cost inflation in the Canadian tar sands is already spiralling. There are major challenges in terms of gas supply, water availability, environmental pollution and CO2 emissions. On current plans oil sands production could increase by 2-2.5 million b/d by 2015 or a rate of 200,000-250,000 b/d per year. Yet by 2015 all the richest sands will be in production and operators will be looking to develop leaner ones. As far as I am aware, despite numerous hopes and plans, President Chavez has yet to sanction an incremental Orinoco project (although Lukoil has just started drilling on the Junin-3 block). Venezuelan production by 2015 is unlikely to even reach 1.5bn barrels/year. If production rates from Canada and Venezuela could be sustained at the 2015 projected levels then the 444 Gb would last for nearly 300 years but the flow would amount to only 5% of this year’s oil production.

Your shale oil resource numbers are undoubtedly perfectly accurate but do they represent anything more than hope? At the moment there is no economically viable method for extracting shale oil. Hundreds of millions of dollars were expended in the 1970s trying to crack what I call the shale oil paradox – to turn the immature kerogen in shale into usable oil the shale must be heated. If shale is heated it swells. When shale swells it becomes a good thermal insulator so the heat doesn’t get very far.

In the 1970s it was effectively proved that all the mine, grind and extract solutions either failed or produced little or no net energy gain. Shell now has an in-situ process that, they claim, has been proved in the lab and is now moving towards a pilot plant trial. It seems to me premature in the extreme to regard shale oil as anything other than a geological curiosity until robust economic viability has been established.

You define an exploration potential of 758 Gb. It is a large number. According to IHS Energy for the last ten years new field discovery has averaged a little over 11 Gb/year. At that rate your exploration potential will take over 66 years to materialise.

Now although you regard the Peak Oil community as far too pessimistic I ask you to consider the following. If we take the simplest and most straightforward reserves based approach and use the best figures for proven and probable (2P) reserves from IHS Energy, these show that by end 2005 some 1,077 Gb had been produced and 1,251 Gb remained, giving total discovered reserves of 2,328 Gb. Now if Peak Oil occurs when 50% of the reserves have been depleted – how long will it be until 1,164 Gb have been produced? Again using IHS Energy figures we are finding a little over 11 Gb/year and consumed 29 Gb in 2005 so our collective net consumption of reserves is 18 Gb/year. On that basis we peak in slightly under 5 years or in 2012 (1164-1077 divided by 18). Rising demand will foreshorten the time to Peak. If you believe we can delay Peak till 55% of know reserves are consumed then we peak in 2018. If you believe, as many do, that Middle East reserves have been overstated, the so-called ‘paper barrels’, then you need to bring the peak forward by around 5 years for every 100Gb of exaggeration (100 divided by 18).

However, there is an even more straightforward analysis, again making use of IHS Energy data. A slide shown in recent presentations indicates that 20% of global reserves had been consumed by 1985, 30% by 1995 but that by 2005 the number had risen to 46.3% (1,077 divided by 2,328). Extrapolating that forward to 50% gives a Peak Oil date of around 2010 while 55% depletion of known reserves would be around 2014.

As you know my personal belief is that an analysis based on new production flows is more accurate. Using all the latest data in my megaprojects (actually all yielding peaks of over 40,000 b/d) I find that Peak Oil occurs in 2011 plus or minus one year. However, whichever approach is used if the Peak occurs at any of the above dates it is very hard to see how any or all the additional resources you (CERA) identify on the right hand side of your table can, even potentially, be mobilised in time to move Peak Oil by more than a year or two.

I therefore conclude that far from dispelling concerns about Peak Oil you have effectively confirmed that they are real and imminent. I do hope that you and CERA find it possible to come and debate all these points with the Peak Oil community.

I look forward to your comments.

Seasons Greetings and best regards

Chris Skrebowski

Appendix 1

Let us consider your table (see above). The first column – cumulative production amounts to 1,078 Gb. As your owners IHS Energy make presentations in which they use 1,077 Gb there is clearly nothing to dispute or debate. IHS Energy uses the figure of 1,251 Gb as remaining 2P reserves at end 2005. If we add up your Opec Middle East, Other conventional and Deepwater we get only 1,127 Gb but as this does not include the proven arctic and heavy oil reserves do we assume that you use the 1,251 Gb for remaining 2P reserves?

In last year’s World Energy Outlook 2005 the IEA examined the Middle East and North African countries and provided reserve estimates attributed to IHS Energy among others. These estimates are significantly lower than the official reserve estimates (as used by Oil & Gas Journal, World Oil and the BP Statistical Review). Your (CERA) figure for Opec Middle East is 662 Gb, BP’s is 742.8 Gb, The IEA’s proven reserves (p141) is 540 Gb. The IEA’s prints 2P reserves estimates for most Middle East countries but the listing is not complete. It would appear to total to around 600-630 Gb. Perhaps you could clarify CERA’s position? Do you use the 2P reserves of 54.9 Gb for Kuwait and the 55.1 Gb for the UAE? Do you include the 25.7 Gb of Qatari NGLs/condensates? Do you include the 26.3 Gb of ‘proven undeveloped’ in Iraq? [All numbers taken from the IEA 2005 Middle East and North Africa report]

A full debate on Middle East reserves is clearly difficult but precisely because it is a key component in determining the risks to future supply it is a debate worth having.

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