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Countdown to $100 oil (39) - BigOil running out of oil

by Jerome a Paris Wed May 9th, 2007 at 05:53:33 AM EST

This is crossposted from Dailykos, where it was drafted on the basis of two recent stories posted here earlier.

It's been a while since I did a countdown diary - almost 4 months (see the full list at the end of the diary), and the impertinent amongst you might point out to the essentially flat oil prices over the past 2 years as proof that I was scaremongering all along ... or simply wrong, and that my silence was simply reflecting my belated acknowledgement of reality...

But the quarterly results of the big oil companies have provided me with some new data:


Production (mboe/d)ExxonMobilShellBPChevronTotal ConocoPhillips
Q1 20064.563.754.042.642.44 2.09
Q1 20074.443.513.912.642.43 2.01

That table tells us that none of the big oil companies has been able to increase its oil production over the past year - in fact, most have seen a decline in their production.

And, in fact, this is not a temporary blip: oil production for these companies has been flat or declining over the past 5 years:

Note: the numbers in this graph are not directly comparable to those in the table above, which also includes gas production, expressed in barrels of oil equivalent

The only company to enjoy a significant production increase is BP, and that was linked to the increase in the production in its 50% owned Russian subsidiary, TNK-BP, which has now also stalled.

So we have an incontestable trend here: Big Oil is unable to increase its oil&gas production. And this, after almost 8 years of almost non stop oil price increases:

What's going on? Aren't markets working? A price increase, especially such a longlasting and massive one, should be a signal to producers to produce more, and to consumers to consume less. As we know, consumers are burning more oil thanks to record economic growth in China and elsewhere, and demand appears to not be very sensitive to prices in both emerging economies and oil producing countries as the good times roll. Despite flatter consumption growth in the developed world, demand is going up overall, and drives prices up.

But supply should then have delivered. And indeed it has, as spare production capacity around the world has been put in service. But new capacity, in particular that developed by the oil majors, should have followed. And yet we see from the above numbers that it hasn't. Again, BigOil has been unable to increase production in the past 5 years.

One thing is obvious - it's not for lack of money. The companies are enjoying record income and profits, thanks precisely to those high oil prices. It's just that this money has been used to a much larger extent to buy back shares (effectively handing the money back to shareholders) than to invest in oil&gas production.

BigOil is effectively telling the market that it thinks its shareholders can use their money more profitably in other sectors of the economy.

Despite the significant increases in their costs (everything has gone up: raw materials, rigs, qualified personnel, as well as tax rates in oil producing countries), the profits from those assets they have put in production are high enough to suggest that oil companies would invest if they could.

Thus it means that they can't. Quite simply, they no longer have access to new reserves.

Many articles in the MSM lately have criticized oil producing countries for not opening their reserves to foreign investors, as well as for not investing enough themselves, via their national oil companies. Whether this is caused by incompetence, short-sighted politics (governments limiting investment to grab the cash), long term strategy (hoarding while enjoying the higher prices on current production) or geopolitical posturing (the "energy weapon"), or, as is likely, a combination of all of these, is fundamentally irrelevant.

What matters is that we have effectively lost control of oil supply (and by "we", I mean Western oil companies whose goal is to bring as much oil as possible to the market to fulfill existing demand).

And that's a pretty fucking big deal.

The good news, of course, is that there is something within our control: our demand. Lowering our demand would mean needing less supply and lower prices, all thing equal. and as we all know, a lot could be done on that front. The bad news, of course, is that our leaders are mostly oblivious to the issue, focusing exclusively on finding new or alternative sources of oil or energy (whether the highly problematic coal-to-liquids, the insane rush towards biofuels, the dirty oil sands in Canada, etc...).

Lest you think that I consider Europeans more enlightened in this respect, let me disabuse you with the following paragraph, which is the full extent to which a summary report (pdf, in French) about the energy prospects of France to 2050 (by the Center for Strategic Analysis of the French government, an influential body full of insiders and knowledgeable experts) talks about "peak oil".

La question de la date et des circonstances dans lesquelles la production de produits pétroliers connaîtra, soit un maximum avant de commencer sa décroissance ("peak oil"), soit plus probablement un "plateau", reste controversée. En bonne logique économique, c'est la réduction de la demande de produits pétroliers dans les pays les plus développés, imposée par la maîtrise du risque climatique, qui devrait en être le fait générateur.

Mais il n'est nullement exclu, surtout si ces politiques tardent à se mettre en place, que ce soit le comportement des pays producteurs qui, par volonté délibérée ou par insuffisance d'investissement, constitue le goulet d'étranglement conduisant à une telle situation. Rappelons à nouveau, enfin, qu'une crise a priori sans rapport avec les réserves et leur exploitation peut créer un tel goulet (menace terroriste, évolution du marché de l'assurance, évolution du transport maritime,...) et que ces crises, dont la survenance est certaine, sont quasi imprévisibles dans leur origine et parfois dans leurs conséquences...

The question of the date and circumstances under which oil production will reach a maximum before decreasing ("peak oil") or, as is more likely, will plateau, remains a controversial subject. In good economic logic, it is the reduction of demand for oil products in developed countries (linked to policies focused on climate change risk) which should be the cause of such event.

However, it is quite possible, especially if such climate change policies are delayed, that it is the behavior of oil producing countries (whether by deliberate policy, or by lack of investment) that will create the bottleneck that brings about such circumstances. Let's note as well that a crisis unrelated to oil reserves and their extraction (terrorist threats, changes in the insurance market, change in maritime transport) could cause a similar scenario and that such crises, whose occurrence is certain, are almost totally unpredictable, as are their likely consequences.

The report focuses to a large extent on climate change and its consequences, which is nice to note, but a strategic analysis of energy issues which dismisses peak oil as something uncertain and about which nothing can be done anyway appears, somehow, ... weak - and terrifying, because it means we won't be ready for it. And that's coming from a literal "who's who" of the energy industry in France, and is meant to shape governmental policy. It's quite pathetic, frankly.

Thus we have highly worrying underlying trends as to oil production and the extent to which it functions according to 'our' rules (i.e. profit driven), and largely clueless governments.

So why have prices remained so low?

The question might be put the other way, in fact. Considering that we've had an incredibly warm winter, which has significantly dulled winter demand, how come prices never really went down? As some of you have noted, gasoline prices are already quite high, early in the 'driving season'. With drivers in the West already used to - and increasingly comfortable with - current price levels, and with demand continuing to sky rocket in China, Iran, Saudi Arabia, Russia, India, prices can only go one way.

And BigOil can cash in to some extent, but they are effectively no longer a decisive player.

:: ::

Earlier diaries in the series:
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact

Good piece, Jerome.

 Considering that we've had an incredibly warm winter, which has significantly dulled winter demand, how come prices never really went down?

reminds me of

Inspector Gregory: "Is there any other point to which you would wish to draw my attention?"

Holmes: "To the curious incident of the dog in the night-time."

"The dog did nothing in the night time."

"That was the curious incident," remarked Sherlock Holmes.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue May 8th, 2007 at 05:34:40 PM EST
from nov to Jan we dropped 20% from 60+ to $50 for a brief second.  We were sub $55 for almost a month IIRC.

Then the US went colder than normal and drew normal amounts of heating oil/propane from storage.  The gasoline surplus that was building like mad slowed and reversed into a big draw as usage went up and shutdowns for maintenance and accidents occurred. Throw in big problems in Nigeria, Iran tension, the world economy not slowing and you get crude back up to fall levels and gasoline to ridiculous cracks.  

And the big point people seem to be ignoring is OPEC actually held together and took 1-2 MMBD off the market since last fall.  One cut about Dec 1 and a bigger one Feb to put the market back into a tightening cycle.  Their failure to fail as a cartel has fooled many people, me included.

These short term effects have much more to say about short term price movements than the longer term problem of big oil not finding any new giant fields.

by HiD on Wed May 9th, 2007 at 02:38:25 PM EST
[ Parent ]
"Big Oil is effectively telling the market that it thinks its shareholders can use their money more profitably in other sectors of the economy."

It's a profit warning going long.

You can't be me, I'm taken

by Sven Triloqvist on Tue May 8th, 2007 at 05:50:22 PM EST
about this for a decade.  They were clearly upping returns and minimizing investment in the period when crude was low and refining margins were shit.  Maybe they aren't all wankers after all.  It was the right decision if you had no foresight.  Compare that to Shell that wasted billions on investment with minimal return.
by HiD on Wed May 9th, 2007 at 02:43:49 PM EST
[ Parent ]
It is amazing. In February, the US Government Accountability Office (GAO) published a Report to Congressional Requesters entitled, "Crude Oil: Uncertainty about Future Oil Supply Makes it Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production". It starts with the statement

Most studies estimate that oil production will peak sometime between now and 2040.

Yet the French strategic report for the period till 2050 does not urge any concern!

by das monde on Tue May 8th, 2007 at 11:12:26 PM EST
Oil sands? I thought they were called "tar sands".

"Until recently Alberta's bitumen deposits were known as tar sands but are now called oil sands."

And what is "bitumen"?

"Bitumen is primarily used for paving roads."

Definitely "tar sands". Isn't marketing wonderful?

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Wed May 9th, 2007 at 12:02:28 AM EST
most people have no idea what bitumen is.  More might get tar but oil isn't incorrect.  Tar is a closer description, but it is oil.

meanwhile on American Idol.............

by HiD on Wed May 9th, 2007 at 02:46:47 PM EST
[ Parent ]
Gas station owner told to raise prices

MERRILL, Wis. - A service station that offered discounted gas to senior citizens and people supporting youth sports has been ordered by the state to raise its prices.

Center City BP owner Raj Bhandari has been offering senior citizens a 2 cent per gallon price break and discount cards that let sports boosters pay 3 cents less per gallon.

But the state Department of Agriculture, Trade and Consumer Protection says those deals violate Wisconsin's Unfair Sales Act, which requires stations to sell gas for about 9.2 percent more than the wholesale price.

Bhandari said he received a letter from the state auditor last month saying the state would sue him if he did not raise his prices. The state could penalize him for each discounted gallon he sold, with the fine determined by a judge.

Market freedom as guaranteed...
by das monde on Wed May 9th, 2007 at 08:39:30 AM EST
Like laws on fixed prices for books, this aims at protecting small retailers from the competition of big chains, which could otherwise easily undercut them and bankrupt them, so it's a decent law (to keep diversity in suppliers, support small local businesses, for instance).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed May 9th, 2007 at 09:03:12 AM EST
[ Parent ]
the concept shouldn't be applied to single station owners doing charity operations.  
by HiD on Wed May 9th, 2007 at 02:39:48 PM EST
[ Parent ]
The US government has plenty of extremely competent analysts working for it that issue very solid reports. Of course, their findings rarely mesh with political whims.

you are the media you consume.

by MillMan (millguy at gmail) on Thu May 10th, 2007 at 02:23:59 PM EST
[ Parent ]
One potential good outcome is that BigOil has incentive to become BigEnergy and invest in non fossil-fuel R&D in the coming years.

Slightly related:

http://arstechnica.com/news.ars/post/20070508-manganese-electrode-could-double-litium-ion-battery-ca pacity.html

As our increasingly wireless and gadget-filled world demands better screens and more complex functions, the underlying technology that may be showing the most signs of strain is also one of the oldest: batteries. Threatened with replacement and subject to massive recalls, the battery technology that we all rely on has shown signs of draining under the stress. But help may be on the way: researchers at Argonne National Labs are presenting data (PDF) on a method that provides a big boost to existing lithium ion batteries.

The researchers were able to get charge capacities of well above 250 mAh/g (more than twice the charge held by lithium ion batteries currently on the market) simply by replacing one of the electrodes. The new electrode relies on a layered-layered structure that includes a lithium-manganese oxide component. The new material apparently transfers charge both by freeing lithium ions and by reactions involving the manganese oxide itself.

by Laurent GUERBY on Wed May 9th, 2007 at 10:45:03 AM EST
Like "Beyond Petroleum"?

By the way, I am selling my energy funds (expensive, badly managed) and am instead going to buy shares in, say, four big oil companies to get my own "index fund". Got any favourites? ;)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed May 9th, 2007 at 11:38:56 AM EST
[ Parent ]
what sensible company would spend all their profits on speculative research?

Big Oil is run by a pack of wankers but they did invest billions in alternatives research in the first half of the 80's.  And will again when they are sure these prices will hold (once burnt twice shy).

by HiD on Wed May 9th, 2007 at 02:41:52 PM EST
[ Parent ]
Of course, investing in solar as things stand is silly. But so is the idea that the oilcos will become "energy companies". Except maybe Gazprom, but they're a gas company anyway.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed May 9th, 2007 at 05:01:29 PM EST
[ Parent ]
hide and watch.

They'll go for shale/coal/gas liquids and perhaps bioliquids.  They have a large distribution infrastructure to exploit.  BP is already in Solar and Shell is putting up windfarms.  I doubt they'll be the top players in 50 years time, but they have resources, a talented pool of engineers and piles of money.  

With a gun to my head I'd put my money on GE and the Silicon valley types to win through though.

by HiD on Wed May 9th, 2007 at 11:22:20 PM EST
[ Parent ]
Yes, they know liquid fuels and that's what they'll do. I agree on that.

But that they should go into power generation (wind, solar etc) except to greenwash is not reasonable. It's a completely different business.

Gaszprom might, as they have expressed interest in building nuclear reactors to reduce domestic demand for gas, so more can be exported to Germany (at greater profit as domestic prices are subsidized). But the reason German gas demand is increasing due to - that's right - nuclear phase out...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu May 10th, 2007 at 11:05:38 AM EST
[ Parent ]
And then when gas runs out, Gazprom can compete with France at exporting nuclear-produced electricity to Germany.

Bush is a symptom, not the disease.
by Carrie (migeru at eurotrib dot com) on Thu May 10th, 2007 at 11:19:33 AM EST
[ Parent ]
For re-export to Italy?...

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu May 10th, 2007 at 01:45:47 PM EST
[ Parent ]

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu May 10th, 2007 at 12:06:56 PM EST
[ Parent ]
Some numbers.

Of the gas used in Germany, a mere 13% was used to generate electricity in 2004 ("Kraftwerke" = power plants), giving about 10% of production. The rest is used to heat over half of German homes and by the industry.

This alone renders your point moot, but I add to it.

From 2003, total German gas consumption stabilised at around 100 million cubic metre, or 3700 PJ, or just below 1000 TWh when expressed in heat energy production. So what might be the prime motivation to look for new sources?

Supply in 2006 (including (re)export!) was 36% from Russia, 26% from Norway, 20% from the Netherlands, 16% own production -- but production in the last three is set to reduce in the coming decades, with domestic production already in a steady fall. So make your guess.

But let's also look at the electricity market -- though it's not clearly separable, newer gas plants being co-generation (also distance heating). Gas power plants gave 11.6% of total production in 2006. That's now Less than all regeneratives combined. As for growth, let's start with 2001 (peak year for nuclear -- it reduced slightly from 171.3 to 167.4 TWh, one nuclear plant was shut down so far): brown and black coal also fell slightly, while gas grew by 18 TWh to 73.5 TWh -- and wind grew by 20 TWh. At the same time, the netto German electricity export grew from 1.3 TWh to 20.0 TWh. Now make the calculation...

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu May 10th, 2007 at 01:42:40 PM EST
[ Parent ]
These are just statistics. As for judging present policy, I of course fault both parties in the government coalition for favouring the big electricity producers in their attempts to remain dominant on the market, with the construction of new power plants, and all parties for insufficient effort on renewable heating (while there is serious effort on further reducing heating consumption with more building insulation and cogeneration).

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu May 10th, 2007 at 01:50:33 PM EST
[ Parent ]
I further add the paradox of the current government's climate policy, which points to a shortcoming of a policy of simply setting emissions targets: even if the German electricity giants' new coal and gas power plants are built, renewables stiffled and nuclear phased out, German CO2 emissions are set to reduce -- due to new fossile-firing plants' higher efficiency than their present cousins. So Big Industry & friends in politics can sabotage a policy of the outright elimination of the CO2 producers.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu May 10th, 2007 at 02:00:56 PM EST
[ Parent ]
Yes, but the phase out has hardly began yet. Demand for gas is not up yet.

When nuclear is shut down (let's pretend for a second it will really happen) it must be replaced. Until just a few years ago everyone thought the replacement should be gas. Then Mr. Russian Gas was replaced by Merkel, all the gas conflicts ensued, oil prices went up, and voila! 26 new coal plants are to be built in Germany.

On top of that, using gas for heating is just... criminal. This noblest of fuels is wasted at producing heat, the lowest quality energy one can imagine, which can be produced in at least half a dozen other competitive ways.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu May 10th, 2007 at 04:48:13 PM EST
[ Parent ]

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