"The Age of Easy Oil is Over" - Is it?

Written by Robin Mills, Energy Economist and Author of 'The Myth of the Oil Crisis'

There is one thing on which almost all pundits, industry veterans, forecasting agencies and members of the public seem to agree. Energy, particularly hydrocarbons, is going to get ever scarcer and more expensive. The "age of easy oil? is over.

Former Shell CEO Jeroen van der Veer opined in April 2008 that, “Easy oil and easy gas...is simply depleted” and that December, his unlikely soul-mate, Russian Prime Minister Vladimir Putin, concurred: “The era of cheap energy, including cheap gas, is coming to an end”.

Oil prices remain high by historic levels, and the continuing Macondo disaster in the Gulf of Mexico seems to confirm the belief that the oil industry is venturing into ever more-challenging frontiers.

Business plans and economic projections are founded on the belief in the end of easy oil. It predicts a rosy future for the Middle East and Russia, drives growth in renewable energy and alternative vehicles, and leads many to worry about "peak oil?, resource wars and a collapse of industrial civilisation.

But what if this belief is wrong?

 

Resources in the ground are clearly abundant. Canadian Association of Petroleum Producers Vice President Greg Stringham, pointing to the 175 billion barrels recoverable from the Canadian oil sands, says, “It won't be a lack of resources that causes a shift away from oil. There's lots of oil.” The United States Geological Survey recently updated their estimates for recoverable oil from Venezuela?s Orinoco Belt to 513 billion bbl. Compare this to BP?s estimate of some 1200 billion bbl of global conventional oil reserves.

Some shale formations, such as the US?s Bakken and Eagle Ford, contain substantial amounts of oil and natural gas liquids too, a form of unconventional oil which has emerged from nowhere in the past few years.

Traditional onshore light crude, though often inaccessible to the international oil companies, remains plentiful too. We might be sceptical of Iraq?s plans to reach some 12 million barrels per day output by 2015, despite the assistance of Shell (LON:RDSA), Total (NYSE:TOT), ExxonMobil (NYSE:XOM), CNPC and others. The political, security and logistical challenges are clearly huge. But most industry observers agree that, in the longer term, the technical potential is there. Iraq?s reserves are likely to increase substantially once the supermajors start work, not to mention the almost unbroken string of discoveries in the Kurdistan region.

Next door, despite sanctions and mismanagement, exploration successes in Iran suggest substantial remaining potential: at least 21 billion bbl found since 1998 in four fields near the Iraqi border. Saudi Arabia has substantial spare capacity, while Kuwait and Abu Dhabi recently updated ambitious plans for production gains.

Non-OPEC is not slacking either. Despite high taxation, maturing fields, often outdated technology and a capricious legal environment, Russian production continues to creep up. Kazakhstan?s long-delayed Kashagan field will finally come onstream around 2013 and yield more than 1 million bbl per day. Brazil?s enormous pre-salt play continues to deliver new discoveries and is now moving into early production. At the same time, frontier exploration is finally yielding fruit, with major finds in Ghana and Uganda, and promising signs in areas such as Mozambique, the Falklands Islands and Greenland.

And we should not forget the potential of old fields. Global average recovery factors hover around 33%, but 50- 60% is often achieved in the North Sea and onshore USA, indicating a vast, low-risk prize for better reservoir management and more systematic use of enhanced oil recovery. Mature areas such as Colombia, Egypt and Oman are rebounding impressively from some years of decline.

Instead of fears that non-OPEC production had peaked, the IEA now sees output broadly flat to 2015. Admittedly, action following the Macondo blowout may hamper US deepwater production, but elsewhere in the world, higher safety standards are to be welcomed, and probably mean only moderately higher costs.

During the decade to 2009, stimulated by high oil prices, reserves increased in every region and by 23% overall, even excluding the undeveloped portions of the Canadian oil sands. Production growth, running at 1.1% annually during the 1990s, accelerated under the stimulus of Asian demand to 1.4% per year from 2000 up to the onset of the economic crisis.

As for gas, the success of US shales has demonstrated that fears earlier this decade of a shortage were wildly pessimistic. Led by technology, the industry was able to respond to high prices, and demonstrate that unconventional resources can be brought into play fast enough to make a difference. Europe, China, Australia, Indonesia, South Africa and India are now all looking seriously at shale gas and coal-bed methane.

With no OPEC to cut production, gas prices remain well below oil on an energy-equivalent basis. Remaining global gas resources may be as much as 12400-20800 Tcf, plus a more speculative 6000 Tcf of unconventional gas outside North America. At the upper end, this equates to 250 years of current production.

Add to this the enormous potential of coal gasification, the conversion of coal and gas to liquid petroleum, the significant if problematic role of biofuels, and the tantalising potential of gas hydrates and cooking oil from kerogen shales.

How do we reconcile this abundance of resources with fears of declining production? The result is the appeal to „the end of easy oil?. The argument goes that new petroleum supplies, though available, are more difficult and costly than before, requiring new technology, located in remote or unstable regions, or environmentally damaging. Hence at best, prices will continue to rise; at worst, some of these resources may be permanently inaccessible.

Yet the idea of easy oil ignores history, and the advance of technology.

There has never been an age of easy oil. Drillers in Persia in the early 1900s had to contend with smallpox, hostile tribes, corrosive water and misleading surface geology. North Sea roughnecks of the 1970s faced mountainous seas, blowouts and massive cost over-runs. Technology advances in line with our needs. Drilling in two kilometres of water was unthinkable in the 1990s; now, it is almost routine.

Much of the run-up in industry costs this century is the result of inadequate investment in the previous decade, and a consequent shortage of engineers, geologists, rigs and steel. In the early 2000s, oil sands developments were thought to require an oil price around $30 per barrel; now $80 is often quoted. Yet the geology has not changed, while technology has advanced significantly. Given time, these bottlenecks can be remedied.

Oil extraction costs are a constant battle between increasing depletion and advancing technology. Once we crack the secret of developing a large resource, such as shale gas or extra-heavy oil, costs fall over time as we gain experience.

Yes, many unconventional plays have higher development costs and require special approaches, but they have no exploration risk, and are typically located onshore in stable countries. As some of the US gas shales are cheaper than traditional North American plays, unconventional resources are becoming conventional.

Talking about the „end of easy oil? is an admission that we have failed as an industry. It gives entirely the wrong message. It tells countries lucky enough still to have some „easy oil? that there is no point opening up to international investment, and no risk of competition if they don?t.

It tells bright young people at university that petroleum is a sunset business and they should look elsewhere for a career. And it tells the general public that energy prices are only going to rise, and that society should make costly efforts to develop alternatives to oil and gas. These are dangerous trends, at a time that many people are already hostile to the petroleum industry on environmental grounds.

Instead, the message should be that we are developing the technology and business models to turn difficult petroleum into easy and environmentally acceptable energy. That is how international oil companies can keep themselves useful and relevant to the leading oil nations, and to the globe?s energy consumers.

By Robin Mills

Robin M. Mills is a Dubai-based energy economist, and author of ‘The Myth of the Oil Crisis’. You can contact Robin directly at: robin@oilcrisismyth.com. The Myth of the Oil Crisis’ explores myths surrounding the global consumption of oil.With oil prices rising, drivers wince whenever they pull into the petrol station and businesses watch their bottom lines shrink. Predictions suggest that the situation will only get worse as oil dries up. It's a plausible argument, especially considering the rate at which countries like China and India are now using oil. Even more worrisome, the world's largest oil fields sit in unstable, geopolitical hotspots like Iran and Iraq. More information on his book can be found at: www.oilcrisismyth.com