US oil supply vulnerability growing

For a century, the US has depended on low cost oil to fuel economic growth. Fortunately, after production peaked in 1970, global supplies have been abundant, so that, outside of periods of disruption caused by political events, US oil traders have still had to contend with downward pressure on price.

Th 100267

Dr. Michael R. Smith,The Energy Network

For a century, the US has depended on low cost oil to fuel economic growth. Fortunately, after production peaked in 1970, global supplies have been abundant, so that, outside of periods of disruption caused by political events, US oil traders have still had to contend with downward pressure on price. In fact, ever since the beginning of commercial production, the world has been in oil oversupply, even when demand has been growing rapidly.

Less than half the oil that has so far been found has actually been produced. There remains a huge amount of discovered oil in the ground, especially if you take into account potential "reserves growth," extra volumes of recoverable oil proven in producing fields.

Th 100267
An estimate of the historic reserves, including remaining reserves from existing fields and reserves from fields yet to be found.
Click here to enlarge image

Indeed there is also plenty of undiscovered oil remaining. New giant fields in the Caspian Sea, off West Africa, in the Gulf of Mexico, developments in the Middle East and potentially in Alaska, and new extra-heavy oil mines in Canada confirm that US energy needs can be satisfied for years to come, barring political crises.

The world's estimated total original endowment of conventional oil reserves, including yet-to-find, is around 2,000-2,200 Bbbl. The world has well over a 1,000 Bbbl left, and there would seem to be 40 to 50 years of future global production, at current rates. The latest estimate for discovered plus yet-to-find reserves, at just less than 1,200 Bbbl, is actually on the high side of historic estimates.

Reserves growth

All this is grossly misleading. For one thing, "reserves growth" is an illusion. Although apparent reserves attributed to the world's portfolio of discovered oil fields have increased year on year, this is mostly a function of conservative or false reporting in the past.

Th 100268
Oil volumes discovered from 1930 to the present, with a forecast to 2050 that assumes a 1% growth in demand per year.
Click here to enlarge image

Recovery factors have improved in some fields but only in those with difficult reservoirs that hold only a small proportion of global reserves. The bulk of reserves additions must be backdated to the date of discovery to get a true discovery profile.

And while there are lots of new fields waiting to be found, especially offshore, there is scant chance of finding more than a few dozen substantial accumulations. In fact, 60% of the world's oil is located in just a few giant fields found before 1970. Without many more giants, it is impossible to add substantial oil reserves.

Even in our last major frontier, the deepwaters of the Gulf of Mexico and West Africa, new discoveries are on average much smaller than they were in previous years. As the chart shows, we now actually discover only around 10 Bbbl each year, but last year we produced over 26 Bbbl to satisfy global demand.

Reserves/production ratio

Which brings us to "reserves/production ratio" - an even greater illusion. Never mind that the discovery rate is insufficient to add all yet-to-find reserves in the time available, the "reserves/ production ratio" disguises the true critical point - the year of global peak production when available supply cannot meet global demand. Oil will never run out, but there will be a time, not so far away, when we want more than we can get.

There is now no question that oil production rises to a peak at a roughly steady rate as new fields come onstream then begins to decline at a roughly steady rate as the first fields begin to deplete and the last few are unable to make up the difference, although increased prices and the presence of infrastructure and technology, both of which lower costs, will stretch decline out in the latter years. The same is true for the world as a whole and, provided all areas are explored in parallel, for individual countries.

Th 100269
World oil production from 1930 to the present, with a forecast to 2050 that assumes a 1% growth in demand per year. Global production peaks in 2016.
Click here to enlarge image

There are now 56 countries where production is in decline and all but a few special exceptions show that peak year occurred when between 40% and 60% of reserves had been extracted. Using these as a model, the year in which the remaining 39 will most likely begin to decline can be determined and the summed data should provide global peak year.

However, since 1970 OPEC has, at times, conserved oil by restricting supply, in effect, reducing demand. This has delayed the global peak, and very likely OPEC will continue to restrict output whenever the price trends downward. To account for this, global peak must be estimated as a function of different demand levels created by different supply restrictions.

As shown in the chart, it is estimated that, at a 1% demand growth, global peak will be reached in 2016. Of course the data are critical and The Energy Network has carried out an independent audit and grass-roots analysis of cumulative production, discovered remaining reserves, yet-to-find reserves, and depletion rates in all 95 oil producing countries. The generated profiles are valuable predictive assets for policy and strategy formulation, for new ventures, for commercial professionals working in energy supply industries, for governments, and for major energy users in the automobile, rail, airline, and shipping industries.

North America

Notwithstanding political risk, a global production capacity peak in the next decade will have serious implications for North American energy security well before the actual event. Not only will supplies be struggling to keep pace as OPEC countries use up their spare production capacity, but also, once the world recognizes that a global peak is imminent, there will be rapid increase in price, severely hampering economic growth.

Th 100270
US and Canadian oil production from 1930 to 2050 by source region.
Click here to enlarge image

US vulnerability is even more apparent when we look at the North American production profile. Although Canada and Mexico are now net exporters, the US, burning around 25% of the world's supply, is highly exposed, already needing to import over 40% of its oil.

Three-quarters of US oil has already been extracted, and there are few new areas of supply. Production is still climbing in the Gulf of Mexico where the deep waters are prolific but, as the chart shows, this area will never be able to match historic production. Even if exploration in the Arctic National Wildlife Refuge is eventually approved, it too will do little to change the US's supply shortfall. Despite very favorable operating conditions and the most modern technology in the world, production from new fields in the US is not keeping up with the decline from aging giants.

Canada has produced around half its conventional oil and is near its peak, although a string of new developments and discoveries off Newfound-land in the Jeanne d'Arc basin are offsetting onshore decline. But Canada is fortunate in possessing the world's largest extra-heavy oil deposit - the Athabasca oil sands of northern Alberta. New mines in this region should increase Canada's contribution to North America's oil supply for the foreseeable future. However, the past has shown that synthetic oil output will not grow fast enough to offset decline elsewhere. Canada is rich in resources, but the rate at which these can be converted to production capacity is a limiting factor.

The Gulf of Mexico is the site of most of Mexico's oil and gas production. Over the last 10 years, Mexico has increased output, with almost all the increase coming from fields in the Bay of Campeche. Enhanced oil recovery projects in the main Cantarell complex of heavy oil fields have been very successful, albeit costly, and a number of new discoveries have also been made. However, even Mexican production is expected to peak within 10 years.

Competition for global supply

By 2016 or thereabouts, extracting sufficient oil to satisfy a fairly modest 1% global demand growth will be physically impossible, and the eventual shortfalls will lead to competition for supply. There will be upward pressure on prices, and economies will be hit by inflation, recession and, above all, international tension.

Even if demand ceases to grow, the US will need to increase imports by almost 1% per year as its production declines. Part of the shortfall may be provided by increasing output from Canada and, in the short term, Mexico, but the bulk will have to come from OPEC. The other alternatives, such as LNG, heavy oil sands in Venezuela, gas-to-liquids projects, renewables, coal, and nuclear power, are generally more expensive and have long lead times. Some are environmentally questionable and mostly are, as yet, ineffective as oil substitutes in transport.

It is no wonder US foreign policy is concentrated on the Middle East, but it is perhaps surprising that the government is not more concerned with improving conservation and energy efficiency. It seems apparent that the US government and its advising organizations are not aware of the impending global supply squeeze, and this is partly due to the rather optimistic view held by many US geologists on the future potential of the world to yield more oil.

Lack of opportunity has already forced the major oil companies, who should know the problem better than most, to cut costs, campaign for the release of protected areas, tinker with alternatives, and forge alliances. But with the stock market to think about, they don't talk about decline and neither does the US Energy Information Administration.

Perhaps under a global scenario of rising prices a new stable energy mix could ultimately be achieved with curtailment of demand, alternative fuels, and massive energy efficiency improvements. However, the length of the transition and who suffers least depend on how soon ameliorating measures are implemented by governments and the energy-using industries.

Although Canada will benefit from growing extra-heavy oil production, stagnation of the US economy through a shortage of low-cost oil will have a negative economic effect in Canada and across the entire world. There is insufficient space here to offer policy options and strategies, but, suffice it to say that by the middle of the next decade, it will not only be OPEC that will be rationing oil.

More in Home