Sunday, August 26, 2012

The End of Peak Oil? Not really!

You may have become aware of the recent paradigm shift in energy.  New sources of natural gas and oil – both heavy and light – are discovered every day. The ‘new technologies’ behind this paradigm shift are horizontal drilling combined with multi-stage hydraulic fracturing or frac’ing.  To be honest, those technologies have been known since the mid-1980s but have reached economic viability and operational merits over the last decade or so. In fact, economically drilling horizontal wells and frac’ing them could not have become a reality without peak oil!

Peak Oil may have taken on different meaning than originally intended but then who does have 20/20 vision far into the future? Peak Oil was a term coined by a Shell geologist as far back as the 1950s. It is a strictly logical concept that assumes that our resources on this planet are finite. The moment you take out the term ‘on this planet’ the concept would completely change because there are probably infinite hydrocarbons to be found throughout space and, if you believe Star Trek and other science fiction stories, numerous other sources of energy. Problem is that it would not be economically nor technically feasible at this point in time to go where no-one has gone before (not counting aliens). To get back to M. King Hubbert’s Peak Oil idea, it basically extrapolates what every petroleum professional knows about individual reservoirs: you discover a pool, drill delineation wells then you fill in the pool with development wells until you achieve the maximum amount of production after which production peaks and subsequently declines until the pool is depleted. You could follow the same reasoning for Canada as a whole or North America (see figure below) or for that matter the entire world. Hence the peak oil theory.

Click to magnify
 This theory assumes though that we can only extract oil or gas from a pool by pumping it out until reservoir pressure is so low that oil is no longer producible. Combining reservoir pressure with pumping creates the energy to flow the oil to the surface. When that pressure is insufficient to get oil to the surface the reservoir is considered depleted. In some cases reservoirs are depleted with up to 95% percent of its original oil content in place. In the 1960’s Canada’s heavy oil was unproducible. But what if you find a way to keep the oil flowing or if you could dig out the oil using mining technology?  It is new economically feasible technology that stretches out Hubbert’s Curve. First we discovered that we could inject water back into the reservoir to replace the produced oil and thus to maintain the pressure in the reservoir. This resulted in increased oil recovery and as a consequence we got significant more recoverable world oil reserves.
What stopped us originally from ‘waterflooding’ older pools? Simply: we were not very good at it and it did cost too much money (we were making a loss) doing so. But that situation changed rapidly – we developed better and cheaper technology and… oil prices went up and before you could say ‘boom’ every oil company in the world started to waterflood. The combination of technology and economics postponed the world oil production peak. Then came enhanced oil recovery schemes that used different but more expensive injection materials: CO2 flooding, polymer flooding, alkali floods, fire floods, steam injection, cyclical steam injection, huff & puff, mining, and SAGD (segregated assisted gravity drainage).
So, really there is peak oil and this is not a conspiracy of oil companies; it is a fact of life. Every time we’re approaching a new ‘peak oil’ condition we see prices spike, people become more afraid of running out of energy, we’re crying about how we need alternative energy, we’re cursing the oil industry for not being able to maintain our lifestyles that are so dependent on oil and gas and then… a paradigm shift – a new technology that postpones the inevitable and soon we forget about the environment and high oil prices and we’re once again happily splurging away our new found ‘cheap energy’.
But today, we’re no longer paying $1.50 for a barrel of oil, or $35 as at the peak of the 1970’s oil crises. No we’re paying $85 to $100 per barrel and consider that affordable. The oil and gas industry has found now the latest technology that is reliable and efficient enough to produce oil and gas at economically affordable prices but we have to get that oil out of reservoirs that even 10 years ago were considered unthinkable. In fact, horizontal drilling combined with multi-stage frac’ing in natural gas reservoirs was so successful that it unleashed a drilling boom in North America that increased our gas reserves to levels sufficient high that we can expect another 100 years of blissful CO2 emissions. Now that, what many geologist felt was the ‘climate change scam and panic’ is finally abating the danger exists that we will neglect the impact of human activity on the earth completely. As a petroleum geologist I implore you: please, don’t give up striving for a more sustainable economy!
The natural gas industry’s success and the subsequent drilling boom has created a glut of gas in North America. Elsewhere in the world prices are 3 or four time as high as here in North America and we don’t have enough pipeline capacity to export the excess gas. This has resulted in a collapsing natural gas market and the destruction of the gas industry. The industry will decline until it stops drilling, losing its skilled workers and until our production and prices have declined and translated in a new shortage of gas supply. Then the story repeats itself.
Today, we see a similar story developing for oil. When Peter Tertzakian wrote his 2007 book ‘A Thousand Barrels A Second’ the world produced 86 million barrels a day and even this expert as well as Jeff Rubin were thinking that we reached peak oil, not many thought that 5 years later we’d produce 95 million barrels per day. And that is just the beginning! Are we heading towards an oil glut as severe as that in natural gas?  Not likely, the oil industry has learned from the natural gas story. But at the same time, both oil and gas prices will over time reflect the price of production plus a modest profit margin. We start seeing today already that gas prices are trending back up and hopefully the industry stabilizes soon; but we won’t any longer held hostage to OPEC and petroleum dictatorships. This is a source of hope for everyone and it probably helped the people of the Arab Spring in fighting the evils of dictatorial regimes. The new energy paradigm may help North America overcome its debt problems and maybe allows for more competitive manufacturing in North America.
But as we have seen now for many years, new inventions such as cell phones, the internet and computers may spur growth in new industries and create another GE, IBM or Microsoft that may last for a hundred years or longer. But it will also create much corporate wreckage. After the initial start-up rush everyone wants in on the new profitable market and soon competition is thus intense that hardly anyone makes a profit and even companies such as Apple lose market share. Then when the market stabilizes we’ll see only the strongest and most efficient survive on modest margins and worldwide branding. It is not difficult to make mayonnaise, but hardly anyone can compete with Kraft. It is not difficult to make a bit of flavored sugar water, but nobody can compete with Coke and Pepsi. It is not difficult to make operating systems for computers but not many can stand up to Microsoft. The same will be true for the oil and gas industry where only the most adept will survive and prosper.
In the end it is all about economics – no matter the spin, in the end it is economics that will prescribe what the energy source of the future will be; economics will prescribe real estate, operating systems, cell phones and other computer gadgets. The beauty is that the next development that matures and becomes economically viable is unpredictable even if it already exists today. Computers existed far before the 1980s when the personal computer broke through. Horizontal drilling and frac’ing existed in the 80s and only broke through in the last decade or so. Some technologies were promising such as the hydrogen engine (Ballard) and Hybrids and Electric cars such as Volt. In the end the economy and the reliability of these technologies will determine when they break through or fail.
Investing in such rising technology industries is risky as has been shown over and over again. It is better to wait and buy them once they are established as blue chips and when their business model is proven. Some savvy investors make money investing as angel investors in new ventures. Our earlier analysis about viable stock market analysis provided some insights as to why this can be extremely profitable. But for most of us, this is not required in order to build a prosperous portfolio and life. So stay away from these forms of investments and stay away from IPOs. In the meantime, I hope you will still believe in the new improved model for peak oil.

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