Many of those who have energy investments will no doubt have an opinion on peak oil. For those not familiar with the theory, here is a brief outline of the premises that the peak oil crowd put forward. First, the world has a finite amount of oil and we have consumed approximately 2/5ths of that know resource. Further to this they believe peak oil can be represented as a bell cure, of which once we have reached the maximum petroleum extraction rate we will enter an era of sharp production decline. They also believe that we are getting close to this peak in worldwide production and that even with flat demand the price for crude oil will continue to rise.
Since I typically question conventional wisdom, I often asked myself the following questions? Who says peak oil is a bell curve, and how do we know that we have used 2/5ths of a known resource? These things are spoken as if they are matter of fact. Are we close to the maximum possible production rate? Perhaps I could offer some competing ideas that will rock the boat.
My theory is as follows.
My question for you to consider is, at what price will peak oil occur? This may seem like an interesting question to ask but it plays a crucial role in understanding how the future will play out. Now price will obviously play a critical role in the peak oil debate. This is because as the oil (or gas) price increases so does the quantity of recoverable reserves AT THAT PRICE. In other words, as the price goes up, more and more marginal reserves become economic further pushing the peak oil problem into the future. We see this all the time as oil companies can book more or less of their production tail depending on the forecast prices. In many instances, wellbores that have been shut in can be restarted as the oil price increases.
It is as if total worldwide petroleum reserves represent a theoretical pyramid. The top third is conventional resources, the middle third unconventional resources, and the final bottom third is extreme unconventional (like gas hydrates, etc). As the price of oil increases, we move further and further down the pyramid unlocking more and more resources. Now the conventional oil at the top of the pyramid is very easy to access and is economic at very low prices. The unconventional oil, such as the oil sands, represents the next opportunity as it dwarfs conventional resources but more importantly it requires higher prices to profitably extract the resource. The oil sands in Canada represents an unconventional resource that rivals all of the vast oil reserves in Saudi Arabia. Now it took two things to access these resources, technology and price.
Finally we reach the final frontier of extreme unconventional resources such as gas hydrates. Accessing these resources seem completely unrealistic today. We can be sure that some day, after the low hanging conventional fruit has been harvested, we will move further down the pyramid accessing this resources. What will it take to access these resources? Obviously it will require a combination of new technology and prices to justify the extraction.
Another key problem with rising oil prices is that it increases the viability of competing resources like solar, wind, and nuclear. This will further put a lid on demand for fossil fuels. Back before oil prices ever excliped $40 per barrel, I wrote a paper in university on the viability of wind power. At the time most engineers & scientists believed it would take $75 oil to make it economic. Back then if you would have suggested that oil prices would be $75 in 2008, they would have sent you straight to the mental hospital. It is hard to imagine that only twelve years ago the price of oil averaged $11.91 per barrel for the year.
Obviously we have seen a rise of these competing resources as the price of oil increases. Ethanol production has been rapidly climbing for several years now. Technology and innovation will undoubtedly unlock more and more of these alternative energy sources in the future. A key feature of these competing resources is that many of them are renewable energy sources. Let’s not even discuss nuclear fusion.
My final argument against the peak oil crowd is as follows. Most known oil pools in western Canada (and the world) typically recover anywhere between 10-40% of the original oil in place (OOIP) under primary and secondary production methods. To reach the high end of that recovery range it takes newer and newer and in some cases tertiary technology (water flooding, CO2 flooding, etc). The problem is that despite our best effort we are still leaving 50-90% of the oil in the ground.
Obviously this represents a huge opportunity for several reasons. First, we already know where the oil is. There is no exploration cost to find the oil. Secondly, the wells are already drilled into the formation. And finally, all we need is some new technologies to recover more and more of these known resources. What will it mankind to develop “New Technology”? Obviously the answer is a higher price of oil. The question is not if, but when we make these discoveries that extend recovery factors to 60-70% of OOIP that we will be unleashing billions and billions of known resources.
Even a 1% increase in recover would mean billions of barrels on pools already discovered. No need to fear, science and technology is working on these tough questions every day, even as you read this (Think THAI, and SAGD)
In summary, we are really still in the early innings of the peak oil ball game. We have done a decent job of exploiting the easy conventional targets. The reader should note that many countries in the world still don’t have a single wellbore within their borders. Conventional drilling still has a way to go. As we continue to drill the conventional resources and we will continue to work our way down the pyramid of energy. Remember the base of the pyramid represents a much larger volume of resources than the top.
As oil prices increase and new technology is discovered we will unleash more and more unconventional resources. The oil sands are one such example. Secondly, alternative energy will also become more and more viable as the oil price rises. Some of these alternatives are already experiencing rapid growth like wind, solar, nuclear, and ethanol. Finally, we already have significant amounts of know oil in the world, all we need is better technology to increase the recovery factors from know resources. This will unleash more and more potential in the future. It is hard to believe our great grandparent rode horses for transportation only 100 years ago. It seems so distant in the past, but Alberta & Saskatchewan just celebrated 100 years as provinces in Canada.
For those who may still question some of these ideas I would ask you to look at the natural gas industry. Natural gas shale, once deemed uneconomic because of it’s tight (non permeable) nature, is the sole reason for the decline in current natural gas prices. All it took was higher gas prices and technology to unleash the vast shale gas reserves.
I know some may not take these ideas seriously, but the boom bust cycle happens again and again. As the old bumper sticker reads, “Please Lord just give us one more oil boom, and this time we won’t screw it up.”
Best Regards,
Kevin
canadianvalueinvesting.blogspot.com
PS. I will try to write up my favorite my favorite energy investment this weekend, but no promises. I will post here and a link at my blog. Stay tuned.
Disclosure: Bullish on natural gas, Neutral on oil.
Since I typically question conventional wisdom, I often asked myself the following questions? Who says peak oil is a bell curve, and how do we know that we have used 2/5ths of a known resource? These things are spoken as if they are matter of fact. Are we close to the maximum possible production rate? Perhaps I could offer some competing ideas that will rock the boat.
My Only Contribution to Peak Oil is that Peak Oil, as we know it, is a Myth.
My theory is as follows.
My question for you to consider is, at what price will peak oil occur? This may seem like an interesting question to ask but it plays a crucial role in understanding how the future will play out. Now price will obviously play a critical role in the peak oil debate. This is because as the oil (or gas) price increases so does the quantity of recoverable reserves AT THAT PRICE. In other words, as the price goes up, more and more marginal reserves become economic further pushing the peak oil problem into the future. We see this all the time as oil companies can book more or less of their production tail depending on the forecast prices. In many instances, wellbores that have been shut in can be restarted as the oil price increases.
It is as if total worldwide petroleum reserves represent a theoretical pyramid. The top third is conventional resources, the middle third unconventional resources, and the final bottom third is extreme unconventional (like gas hydrates, etc). As the price of oil increases, we move further and further down the pyramid unlocking more and more resources. Now the conventional oil at the top of the pyramid is very easy to access and is economic at very low prices. The unconventional oil, such as the oil sands, represents the next opportunity as it dwarfs conventional resources but more importantly it requires higher prices to profitably extract the resource. The oil sands in Canada represents an unconventional resource that rivals all of the vast oil reserves in Saudi Arabia. Now it took two things to access these resources, technology and price.
Finally we reach the final frontier of extreme unconventional resources such as gas hydrates. Accessing these resources seem completely unrealistic today. We can be sure that some day, after the low hanging conventional fruit has been harvested, we will move further down the pyramid accessing this resources. What will it take to access these resources? Obviously it will require a combination of new technology and prices to justify the extraction.
Another Problem for Rising Oil Prices
Another key problem with rising oil prices is that it increases the viability of competing resources like solar, wind, and nuclear. This will further put a lid on demand for fossil fuels. Back before oil prices ever excliped $40 per barrel, I wrote a paper in university on the viability of wind power. At the time most engineers & scientists believed it would take $75 oil to make it economic. Back then if you would have suggested that oil prices would be $75 in 2008, they would have sent you straight to the mental hospital. It is hard to imagine that only twelve years ago the price of oil averaged $11.91 per barrel for the year.
Obviously we have seen a rise of these competing resources as the price of oil increases. Ethanol production has been rapidly climbing for several years now. Technology and innovation will undoubtedly unlock more and more of these alternative energy sources in the future. A key feature of these competing resources is that many of them are renewable energy sources. Let’s not even discuss nuclear fusion.
The Final Nail in the Peak Oil Coffin
My final argument against the peak oil crowd is as follows. Most known oil pools in western Canada (and the world) typically recover anywhere between 10-40% of the original oil in place (OOIP) under primary and secondary production methods. To reach the high end of that recovery range it takes newer and newer and in some cases tertiary technology (water flooding, CO2 flooding, etc). The problem is that despite our best effort we are still leaving 50-90% of the oil in the ground.
Obviously this represents a huge opportunity for several reasons. First, we already know where the oil is. There is no exploration cost to find the oil. Secondly, the wells are already drilled into the formation. And finally, all we need is some new technologies to recover more and more of these known resources. What will it mankind to develop “New Technology”? Obviously the answer is a higher price of oil. The question is not if, but when we make these discoveries that extend recovery factors to 60-70% of OOIP that we will be unleashing billions and billions of known resources.
Even a 1% increase in recover would mean billions of barrels on pools already discovered. No need to fear, science and technology is working on these tough questions every day, even as you read this (Think THAI, and SAGD)
Summary – Peak Oil or Peak Prices
In summary, we are really still in the early innings of the peak oil ball game. We have done a decent job of exploiting the easy conventional targets. The reader should note that many countries in the world still don’t have a single wellbore within their borders. Conventional drilling still has a way to go. As we continue to drill the conventional resources and we will continue to work our way down the pyramid of energy. Remember the base of the pyramid represents a much larger volume of resources than the top.
As oil prices increase and new technology is discovered we will unleash more and more unconventional resources. The oil sands are one such example. Secondly, alternative energy will also become more and more viable as the oil price rises. Some of these alternatives are already experiencing rapid growth like wind, solar, nuclear, and ethanol. Finally, we already have significant amounts of know oil in the world, all we need is better technology to increase the recovery factors from know resources. This will unleash more and more potential in the future. It is hard to believe our great grandparent rode horses for transportation only 100 years ago. It seems so distant in the past, but Alberta & Saskatchewan just celebrated 100 years as provinces in Canada.
For those who may still question some of these ideas I would ask you to look at the natural gas industry. Natural gas shale, once deemed uneconomic because of it’s tight (non permeable) nature, is the sole reason for the decline in current natural gas prices. All it took was higher gas prices and technology to unleash the vast shale gas reserves.
I know some may not take these ideas seriously, but the boom bust cycle happens again and again. As the old bumper sticker reads, “Please Lord just give us one more oil boom, and this time we won’t screw it up.”
Best Regards,
Kevin
canadianvalueinvesting.blogspot.com
PS. I will try to write up my favorite my favorite energy investment this weekend, but no promises. I will post here and a link at my blog. Stay tuned.
Disclosure: Bullish on natural gas, Neutral on oil.
