Historic J.P. Morgan Investor Conference
Marks Official Recognition of Peak Oil Issues By Financial
PEAK OIL: DEBATE
© Copyright 2004, From
The Wilderness Publications, www.copvcia.com. All Rights
Reserved. May be reprinted, distributed or posted on an
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April 22, 2004 1800 PDT (FTW)
-- I sometimes think peak oil has already hit Manhattan
as subways become increasingly unpredictable (although
surveillance cameras are state-of-the-art) and escalator
shut-downs present stair master survival challenges, a
kind of perverse underground amusement. Unfortunately,
surfacing on Fifth Avenue does not end the scenario, for
where once there was excellence and exquisite fashion,
now there are bargain stores catering to New Yorkers who
are poor, and yes even starving.
So I was particularly fascinated by the opportunity to listen-in to the telephone
conference call that JP Morgan held for its clients on April 7 and 8, "Peak
Oil: Fact or Fiction", which From The Wilderness was given exclusive
permission to monitor. Maybe there would be answers as to whether or not
Manhattan is a harbinger of what's to come for the rest of the nation, and whether
its fleeting opulence (not counting all the questionably-financed real estate
extravaganzas rising up) is energy-related.
The main speakers faced-off on separate days. First Dr. Colin Campbell, Founder
of the Association for the Study of Peak Oil, succinctly gave his position saying
that peak oil is "such a geological matter. Campbell says we're now
at the halfway mark and that "by 2010 volatility comes to an end and then
terminal decline" sets in.
The pronouncement is chilling. What's more, Campbell says that "over the
next few years everybody will become aware of this, and in some ways the perception
of this growing situation is as serious as the event itself. Campbell's
a retired geologist with decades of experience in the oil industry in both exploration
and executive positions. He compares peak oil to old age saying
that a man knows when it has set-in.
Campbell was followed the next day by Michael Lynch, a computer oil and gas modeler
for the past 25 years, President/Director of Global Petroleum Strategic Energy
and Economic Research. Lynch came out slugging, informing conference callers
that Campbell has refused to appear with him since 1997, saying "you'll
understand why very shortly. He seems to view Campbell as old school and too
tired to be optimistic about the future. Perhaps a bit like Cheney and Rumsfeld
having their last hurrahs before retiring into the bed & breakfast business
on the Eastern Shore of Maryland.
Lynch believes the Hubbert model that Campbell 's theory relies on discoveries
and production follow a bell curve is not only "incorrectly modeled",
but is "much closer to being junk science. He says further, that while
Campbell and his colleague, Jean Laherrère, have now "stopped saying
that" . . . they've "never admitted they were wrong.
Lynch takes the position that URR Ultimately Recoverable Resources is not
a static amount and therefore cannot follow such creaming curves. "It grows
over time," he says, "as a result of economic changes, development
in an area, but also because of technology, and in some cases, better scientific
Campbell says today's oil supply is finite, and that it all came into being during
two periods of global warming 90 million and 150 million years ago when "excessive" algal
blooms formed on the seas and lakes, became heavier and heavier, and sank to
the bottom of the rifts where they were "preserved" and pressure-cooked.
The resulting oil and gas then began leaching its way back up to the surface
through the sandstone (in the pore spaces between the grains of sand) and rock.
Campbell is adamant about the peak oil issue not being an economic or political
one, but simply a case where we've now so depleted our "endowment" that
peak oil will occur by 2010, and that soon after there will be a rapid fall-off
in oil resources, which will profoundly affect world civilization.
So the conference began with a bit of posturing and name calling with Campbell
announcing "no common ground" with the "flat Earth economists" (Lynch
et al.), who he says believe there's an infinite supply of oil (no one believes
this, including Saudi Aramco).
Lynch called Campbell, Laherrère (and investment banker Matt Simmons)
Malthusian pessimists, and obliquely referred to Simmons's upcoming book on peak
oil as "content free.
Fortunately, JP Morgan's clients pressed speakers for details, which made the
conference truly worth listening to. Campbell advised that peak discovery of
oil was in 1964 and that it's been falling for 30 years. He also said that by
1981 the world was using more than it produced 1 barrel is now found for every
6 consumed and that there's little spare capacity anywhere in the world.
As further proof of peak oil, Campbell adds that the major oil companies are
getting out of the business shedding staff, divesting marketing sectors, outsourcing
jobs, cutting back on exploration and drilling fewer wells the seven sisters
are now four. He notes the majors are also buying back company shares (i.e.,
BP), and argues that "the value of their past is more important than their
future. He quotes the late Robert Anderson of Arco: "This is a sunset
industry and the sun is fairly low in the sky."
However, Campbell does spare the more "nimble" independent oil companies,
who he says will press on producing what's left, subcontracting to state companies
however they can, through initiative, enterprise and bribes. And that oil in
the ground will become increasingly valuable.
Lynch argues the oil majors are alive and well, thinking about returns and making
their money upstream, just not investing in things like refineries, etc. downstream.
He says lack of spare capacity and any pullback from the oil business is not
because there's not enough oil out there. It's due to economics and politics.
Campbell counters that the picture is far worse than anyone's thought because
he's "pretty sure" we may have to remove over 200 billion barrels of
oil from world estimates as a result of Saudi Arabia, the world's largest oil
producer, and Kuwait misrepresenting their oil numbers. Says Campbell, "If
you're limited to public information and you're watching reserves grow, you can
believe it can go on forever."
John J. Hoey, who served as President of Atlantic Refining Company, as well
as Hondo Oil (Robert Anderson was CEO), and is currently founder and director
of Tethys Oil in Stockholm, says the "Peak Oil debate is just that -- a
debate. Hoey believes the adverse remarks about lack of disclosure
and transparency of sovereign entities like Saudi Arabia, Russia, etc. appear
self serving and disparaging, that the oil producing countries are not public
companies and have no duty or obligation to disclose any more than they deem
appropriate. He advises: "Try to get some technical information
from a major oil company on a specific 'tight' well being drilled or completed
in a highly sensitive geological area."
Moreover, Hoey says he's listened to all the peak oil arguments (including the
JP Morgan call-in) and "gravitates" towards Lynch rather than Campbell
or Harvard Business School alumni and friend, Matt Simmons. He also lived
in Saudi Arabia during the 70s and worked closely with Aramco and Petromin;
Hoey says he has the "highest respect for the professionalism, integrity
and future of their petroleum industry.
Nevertheless, Campbell presents a litany of pessimism on future
oil as he deconstructs reserve reporting: He says Iran and Iraq may also
have been manipulating their numbers , though he's "less
sure. That UK gas and oil will be "virtually exhausted" by 2020, as
acknowledged by the UK government (BBC reports Wood Mackenzie oil consultants
described UK North Sea exploration as "the industry's biggest waste of money
over the past five years). That North American oil and gas is hopelessly depleted it
took 40 years for the US to go from peak discovery to peak decline and that " Canada
is way into decline. Norway has the Ecofis "exceptional chalk reservoir," which
has been kept going through technology, but that doesn't change the overall pattern
of decline. Germany has "no hope" and is long past peak. Argentina
's production is down. Colombia has peaked. Egypt , with a teeming population,
has hit its peak and has no money for exploration "where will it get its
oil from?" Indonesia has "no reason to remain in OPEC.
The only upbeat pronouncements from Campbell were that Iran will have a "rapid
rise" in oil production until 2015 (and then fall), even though a Power
Bridge Associates caller told Lynch he's been studying reserves in southwest
Iran's Khuzestan field and that Iran has about 200 billion barrels of oil and
needs capital to develop. He says Iraq holds "north of 300 billion.
Campbell believes Russia will see a second peak in 2010 the first was under
Soviet rule and influenced by OPEC price cutting in the 1980s which made Soviet
oil uncompetitive. The increase in OPEC production stemmed from revisions in
reserve estimates which allowed OPEC to exceed reserve-connected quotas.
Heavy oils of Canada and Venezuela he believes will grow, but so will the costs
of getting oil out. Canadian oil sands may be a good investment with an expected
price of about $20 a barrel, but right now the project is stuck, and is consuming
Alberta 's natural gas meant for the MacKenzie pipeline and North America's
gas needs. Polar oil has "uncertain possibilities. "Deep water booms
and goes quickly." Kashagan field in the Kazakhstan sector of the Caspian
will produce 10-15 billion barrels, Campbell says, "but not what was hoped
Moreover, Campbell's bleak scenario includes not only a challenge to home heating
and the gas tank. He reminds that the growing of agricultural products (crop
nutrients and farm machinery) and their transportation are heavily dependent
on petroleum meaning global food shortages.
Lynch's principal role seemed to be one of resuscitating the audience after Campbell
's address. He backed up the Saudi Aramco claim that its definition of "oil
initially in place" (according to Society of Petroleum Engineers, World
Petroleum Congress and the American Association of Petroleum Geologists) is
the "volume or the amount of oil that's presently in the subsurface. Lynch
also disclosed during the talk that he has worked off and on for the Saudis and
does work in the short sell market, saying "I'm sure there'll be questions
about that." Curiously, there were none.
Campbell explained the origin of the oil numbers system saying it all began with
SEC reporting practices. For financial reasons, US oil company owners were allowed
to report both proved producing reserves and proved undeveloped wells. The SEC
model then became an international standard. He said "companies found it
convenient to be very conservative about what they reported; they effectively
reported as much as they needed to give a satisfactory financial result, which
meant the build-up of stock of under-reported reserves.
The Saudi "oil initially in place" numbers, which Lynch refers to,
were presented at a Center for Strategic and International Studies (CSIS) meeting
in Washington February 24 by Aramco's Manager of Reserves Management, Dr. Nansen
Saleri, and Mahmoud Abdul Baqi, VP of Exploration. They both said that in the
last 20 years Saudi Arabia's oil in the subsurface has grown by 100 billion
barrels and it currently has "in the ground" 700 billion barrels.
Aramco also claims a 52% success rate with 64 exploratory wells drilled in the
past 10 years and says that for the fourth year in a row the company reduced
its water cut levels with the total company aggregate water cut for 2003 less
than 27% (Russia's is 80%); water cuts pose a problem because while water flushes
out some oil, it tends to further seal-in a lot of what remains. Aramco cites
reserves at 261 billion barrels reserves defined as "oil that can be recovered
commercially with current technology. Aramco says they expect to produce 12
million barrels of oil a day though 2025.
Lynch also obliquely referenced Matt Simmons's CSIS presentation, calling him
an investment banker who "sort of said I read some technical articles and
they describe engineering problems in the field. He made a whole bunch of mistakes
which the Saudis corrected. . . . And he admitted he wasn't an engineer." Simmons
referred to Aramco's sophisticated "MRC (maximum reservoir contact) wells" with
multiple branches and high resolution digital imaging as "bottle brush" wells.
Lynch did not question the A ramco claim that by 2025 Saudi Arabia expects to
have 900 billion barrels of oil in the ground; Saudi Aramco's position is that
only 14% of their "tank" has been tapped and that the main field Ghawar
(actually many fields in one) is only 48% tapped. Lynch did say Saudi Arabia
was virtually unexplored when it comes to oil, backing up Aramco statements
regarding plans to push forward to the promising Saudi-Iraqi border (Campbell
says you won't find much there) as well as into the previously inaccessible Rub'al-Khali making
use of "intelligent wells" and remote control digital imaging with
a 10-million and soon 100-million cell resolution.
OPEC advises its figures also refer to member countries' remaining reserves and
not total discovered, but says it does not ask member countries to verify reported
numbers unless there is a major discrepancy. OPEC says its figures are in line
with USGS and BP numbers, however this means that they are based on projected
demand, which leaves things a bit fuzzy. Matt Simmons has called the very concept
of proven reserves "still an art form.
OPEC's current Director of Research, Dr. Adnan Shihab-Eldin, a Berkeley-trained
nuclear physicist perhaps the most dynamic personality to emerge at OPEC
since Sheikh Ahmed Zaki Yamani is guiding the organization towards greater
transparency in reporting its oil numbers by participating in JODI (Joint Oil
Data Initiative) with APPEC (Asian and Pacific Petroleum Exporting Countries),
IEA and UNSD. Shihab-Eldin previously served as a director of the International
Atomic Energy A gency and as Director, Kuwait Institute for Scientific Research where
I first met him in the late 1970s when KISR was developing solar energy projects.
Shihab-Eldin, now OPEC's number two man, said the following regarding world
"In the current scenario of heightened political uncertainty in the Middle
East, it is widely recognized that there is a premium on current crude prices,
related to these events, of as high as $4-$5/b, rather than any basic lack of
Our projections, derived from the OPEC World Energy Model, show
world oil demand growing from 76 million barrels per day in 2000 to 89 million
barrels per day by 2010, and by over 106 million barrels per day by 2020. Two-thirds
of the increase in demand over that 20-year period will come from China and developing
countries. This highlights the relevance of such projects as the new multi-billion
dollar pipeline which will stretch from Eastern Siberia in Russia to Northeast
China with construction due to start in 2003. . . . Non-OPEC production is
expected to increase throughout the entire period, with the expected decline
in North Sea output more than compensated by increases in developing countries,
the CIS and the Caspian region [which he says will add an additional 4 million
barrels a day to world supply by 2015 and believes that new discoveries will
get a boost from newer technologies]." Conference on
Oil and Gas Transportation in the CIS and Caspian Region, Vienna, Austria,
Neither Campbell nor Lynch referred to the JODI figures,
but there is little doubt that the time has come for the
numbers to be counted. Even Lynch admits that OPEC's reserves
numbers in the past were often referred to as "political
reserves. Lynch says: "I was in Kuwait in 1987 and we were laughing about
the reserves numbers. Everyone knew those numbers were not reliable.
And Lynch still believes "There are no good reserve numbers anywhere in
the world especially in the past 30 years." But he says he's referring
to "proved reserves" not the ultimate amount available. And that
proved reserves numbers are not really very important in long-term modeling.
He characterizes Colin Campbell's and Jean Laherrère's modeling as "curve
fitting" not geological research "like people who look at stock
market cycles and try to come up with waves. Lynch acknowledges that field size
is determined by geology but says "the process of discovery is an economic
Lynch also accuses Laherrère of mixing up political and economic events
with geological ones in terms of the pause in oil exploration in the Middle East
after 1980, when Lynch says there was a world oil glut, and the Saudis and Kuwaitis
stopped exploring because they have 100 years of oil left. And then the wars
happened, Iran/Iraq and the Gulf War. What's more, Lynch says the creaming curves
Campbell produces are not reliable estimates because field sizes are not stable citing
field growth according to the IHS database in Norway (where horizontal drilling
is producing results which could never be realized otherwise, he says), in
Britain and Canada .
Lynch says that Jean Laherrère told the Abu Dhabis their oil was scarce
and he just wasn't believed and that OPEC doesn't even want to deal with this "nonsense" but
people keep asking them about it. Says Lynch, "If you look at all their
[Campbell, Laherrère] curves, what you find is they're not doing serious
statistical analysis. They're just drawing curves and then eyeballing them.
Just looking at them and saying, does this appear to follow a pattern?"
Lynch looks at slides regarding British North Sea production. He says we were
told the big fields have been discovered and the small fields don't matter
and new technology won't increase recovery. But he says Campbell was wrong
about his 1991 predictions of 500,000 barrels a day, citing current production
at 2 million b/p/d and that this suggests "you don't know that the estimate
of total resources in the UK is reliable, that it is stable.
Lynch also claims Campbell is himself raising estimates of URR as well as extending
the peak out that Campbell first predicted peak oil for 1989. He says in 2002
Campbell updated a table from his 1997 book increasing the amount of URR by over
100 bb in 5 years, attributing it to countries discovering more oil "than
they ever would have in 1997.
Lynch concludes that the danger in the Middle East is more political when it
comes to the supply of oil, and not its running out. A Barron's 4/5/2004 editorial
suggests the real scare is that "OPEC producers will stop pricing their
oil in dollars and switch to a basket of currencies for both the pricing and
settlement of crude-oil transactions. And Crown Prince Abdullah's historic
visit to Moscow and talks with Vladimir Putin are further proof of politics
as oil's ace card.
Says Lynch, "If you believe resources are scarce and companies should run
up their debt levels, buy up reserves, sign a long-term contract for engineers,
do everything they can nobody's doing that. They're trying to hunker down
against another price collapse because that's much more likely than prices
staying up at $35."
A caller from Arc Asset Management wanted to know why investments in US public
oil companies weren't being realized in the past 2-3 years, although there
had been substantial increases in exploration and development spending. The
caller questioned why there was a lack of production response, was it because
the decline rates have been getting much steeper? (The 1997 oil hype in Azerbaijan,
which took me to Baku, came to mind; after the smoke screen came down there
were dry holes, investors threatening to jump off the roof and the gobbling
up of Amoco by BP plus the resignation of the US Energy Secretary.)
Lynch responded by saying give Capex time, you haven't seen the results yet,
and that "it's partly delay because what you're seeing is companies putting
money into big projects like deep water West Africa that take longer to come
online than a shallow Gulf of Mexico field." He said the Chad pipeline
took 2-3 years, and mentioned costs on such projects could go up as much as
John Hoey of Tethys Oil agrees. "It would be folly," he says, "to
solely rely on the old school theories of recoverable reserves, tertiary recovery
methods and technologies, old maps and geological interpretations." Hoey
says the technology is moving too fast; they are now drilling faster, smarter,
deeper and more effectively, revisiting areas that were abandoned, looking
for different plays -- all helped by the economics of $30/bbl oil. He
argues, "The worldwide deepwater drilling market expenditures have
been estimated at $40 billion between 2003 and 2007 versus a fraction of this
amount 10 years earlier, and were virtually nonexistent 10 years prior to that."
Lynch's talk was followed by a presentation by Dr. William Fisher, Director
of Geoscience at the University of Texas and an advisor to Energy Secretary
Spencer Abraham. He held up a slide with some Shell figures (odd, considering
Shell's in the hot seat for overstating its reserves by 20%), which looked
at the range of conventional vs. unconventional oil in terms of a price scenario ultimate
at 3 trillion barrels and unconventional at another trillion barrels and
said cost probably will come down due to technology.
Fisher says he concurs with USGS "folks in Denver " who project peakings "at
either a high demand of 3% a year out to 2025, and at 1% or less, it extends
substantially. Fisher says future trajectory will be demand-defined, not constrained
by physical shortage.
Fisher also says, fuel reserve growth "has been the biggest dynamic over
the past 25 years. He notes that the USGS "roughly equates reserve growth
potential with new field discovery it's about 650bb of each. Fisher says
he feels it's necessary to address this because some "early peakers" think
reserve growth is a myth or assume it's accounted for in "proved reserve
Fisher sees "multi-component seismic coming along" to deal with complex
high density rock, carbonate rocks, and expects there will be a lot more computer
imaging. He says 3D seismic works best in sandstone.
Surprisingly there is some common ground with Colin Campbell. Fisher suggests
the oil age is pretty much over though not because the world is running out
of oil but because oil will have outlived its usefulness (what
will replace it is less clear). Fisher and Campbell both think coal-bed
methane will be important. Fisher believes we're at the "threshold of
the methane economy. And he says worldwide stranded pockets of gas will lead
to cost-effective LNG (at a stable price of $4.50 to $5 a barrel).
Over the next 30-50 years, he believes natural gas will be the source for any
development of the hydrogen fuel cell. Yet nowhere did he acknowledge well-documented
recent supply shortages or obstacles to overseas importation. He
says further that some of the downward curves on crude oil demand "out here
about 20 or 25 years are factoring in a substantial introduction of the hydrogen
fuel cell in the transportation mode." (Now we're talking volatility!)
So as the peak oil caravan moves back to CSIS April 27, we await more answers.
It will be the second US appearance by the Saudis on the issue this time
Saudi Arabia 's oil minister Ali Naimi speaks plus Secretary Abraham and
Federal Reserve Chairman Alan Greenspan. The event will be a significant ratcheting
up of the debate with the world's press in attendance and standing room only.
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