The Take

Oil majors are whistling past the graveyard

Posting in Energy

The latest outlooks from BP and ExxonMobil project a rosy future for oil, while bottom-up forecasts see world oil production declining before 2020. Who you gonna believe?

The world's "supermajor" independent oil companies -- BP, ExxonMobil, Chevron, Royal Dutch Shell, and Total -- project a rosy future, assuring us that oil will be abundant for decades to come. But in fact they're spending record amounts to keep oil flowing, while their production is actually falling.

The BP Energy Outlook 2030, released in January 2013, confidently asserts that oil production will keep pace with demand. Through 2030, it projects, "More than half of the growth will come from non-OPEC sources, with rising production from U.S. tight oil, Canadian oil sands, Brazilian deepwater and biofuels more than offsetting mature declines elsewhere." Indeed, BP says, the "once-accepted wisdom has been turned on its head. Fears over oil running out –- to which BP has never subscribed –- appear increasingly groundless."

Peak oil was never about "running out." That's a strawman argument. The word "peak" in peak oil simply refers to the maximum production rate of oil, as I have explained ad nauseam. While oil producers constantly trumpet new discoveries and rising reserves, they tend to avoid talking about production rates.

But reserves are meaningless if they don't amount to an increasing rate of production. If you had a billion dollars to your name, but could only withdraw $1,000 a year, would you be worried about running out of money or paying your bills?

So let's look at BP's forecasts versus its actual production history in the chart below by geophysicist Jean Laherrère, who worked for 37 years at the French oil company Total S.A. and headed their exploration techniques group.

(The above chart and many others are featured in this excellent March 11 post by Matt Mushalik, which I encourage SmartPlanet readers to explore.)

Clearly, BP has a horrible forecasting record, with actual production continuously sagging well below its forecasts since 2005. Not even the 2010 Deepwater Horizon disaster can account for that.

Sadly, as Mushalik's post details, BP is hardly alone in this regard.

In its new Outlook for Energy: A View to 2040, ExxonMobil sees, with admirable candor, conventional oil declining (hello, peak oil!). But it asserts that this will be "more than offset by rising production of crude oil from deepwater, oil sands and tight oil resources."

How's ExxonMobil's predictive accuracy? Again, Laherrère has the chart (below):

(Source: Matt Mushalik)

Not quite as abysmal as BP's, but still pretty awful. Since 2004, the only Exxon forecast which undershot actual production was the one from 2009, and its 2010 forecast was correct for 2011.

A fusillade of fantasies

But do these optimistic forecasts for tight oil, tar sands, biofuels and deepwater hold water?

SmartPlanet readers know what I think about tight oil: It's impressive, but it has been ridiculously oversold (see here, here, here, and here). I won't elaborate on that today, but I will note that BP's opaque forecast for tight oil to grow by 7.5 million barrels a day by 2030 is at sharp variance with the detailed, bottom-up, highly transparent forecast of veteran geologist David Hughes, who finds that U.S. tight oil could peak in 2016 at less than 2.5 million barrels per day, and then decline.

(Source: J. David Hughes, "Drill, Baby, Drill")

Tar sands production has another long track record of failing to meet expectations. Consider the chart below illustrating wretched forecasts by the Canadian Association of Petroleum Producers and actual Canadian oil production, which comes from the recent U.S. State Department report on the Keystone XL pipeline.

(Hat tip to Elana Schor.)

Biofuels also seems a strange thing on which to pin much hope. According to Pike Research, the United States is the world's top biofuels producer. Nearly all of that is ethanol produced from corn, as mandated by the Bush-era Energy Independence and Security Act of 2007. But, as I explained one year ago, the energy return on energy invested of corn ethanol is so low that it was always destined to be an uneconomic source of liquid fuel. When the federal tax credit for ethanol production expired at the end of 2011, the sector began to struggle. Now, as the New York Times reported last weekend, about 10 percent of the nation's ethanol plants have ceased production, with dozens more "hanging in the balance." Consumption of gasoline, with which ethanol is blended, has shrunk by 1 million barrels a day since the heady days of 2007. And the first commercial cellulosic ethanol plant in the U.S. went bankrupt last month.

Deepwater production may yet grow, but its future is far from certain. As we all learned in 2010, it's risky. It's also extremely expensive. Worse, the production from deepwater wells declines steeply, just as unconventional tight oil and shale gas wells do. The jagged production history of Thunder Horse, the flagship deepwater project in the Gulf of Mexico developed by BP and ExxonMobil, shows it's been declining at around 4 percent per month, or 50 percent per year.

(Source: Jean Laherrère, from a forthcoming paper)

As for the much-ballyhooed "pre-salt" deepwater oil off the coast of Brazil, most analysts agree that there's probably a good deal of oil there (as much as 80 billion barrels recoverable), but it's very challenging and extremely expensive. One recent paper by a World Bank analyst said that the new production might permit Brazil to remain self-sufficient in oil, but will never make it a major exporter.

The faith that BP, ExxonMobil and others place on tight oil, tar sands, deepwater and biofuels seems misplaced at best.

Turning up the treadmill

Unconventional oil is undoubtedly expensive. Bringing the next tranche of supply online will require another repricing of oil, just as the repricing from $31 a barrel at the beginning of 2004 to $111 a barrel at the end of 2012 (in Brent benchmark prices) enabled the recent boom from tight oil and other unconventional sources.

But how much new production did that tripling of oil prices bring? A mere 5.4 percent increase in supply -- world production in November 2012 was just 3.9 million barrels per day over the January 2004 level, according to the EIA. This is success?

As the chairman of energy consulting firm Douglas-Westwood explained in a March 2012 slide deck, $2.4 trillion in capital expenditures from 1995 to 2004 produced 12.3 million barrels per day of additional oil production. From 2005 to 2010, the same amount of spending produced a decline of 0.2 million barrels per day. Why? Because "each marginal barrel will be more expensive and will require more equipment and services to extract."

If you don't believe that prices need to go higher -- much higher -- in order to fulfill the forecasts of the oil majors, then you should go back and read my Feb. 20 post. That's the only way to explain why the oil industry is trying to convince the United States to become an exporter of crude oil and natural gas, when it's still a net importer of both.

Indeed, price is the one thing that the forecasts of the oil majors studiously avoid talking about. There wasn't a single mention of it in ExxonMobil's outlook, and although BP's outlook did not offer actual cost figures for new supply, it did note that "High prices are also supporting the expansion of supply, and not just from conventional sources."

What we do know is that the oil industry is spending an enormous amount of money to accomplish very little. According to a March 4, 2013 article in the Oil & Gas Journal, the supermajors have been spending about $100 billion dollars a year, collectively, on exploration and production since 2008.

And what did they get for their money?

According to another excellent post by Matthieu Auzanneau in Le Monde, they got a 25.8 percent decline in oil production since 2004. Leaving out the Russian oil assets of Tymen Oil Company (TNK), which BP acquired in 2003 and subsequently sold to pay for the damages of the Deepwater Horizon disaster, the supermajors' production actually has been declining since 1999.

(Source: Matthieu Auzanneau)

The underlying problem, of course, is that production from the world's old (and cheap) oil fields is continuously declining at over 5 percent per year -- another dirty little fact that the oil majors studiously avoid discussing. Thus, global oil production is a treadmill, where you have to run just to stay in place.

I'm sorry, Nick Butler, but Exxon's outlook is unimportant and worthless, and a piece of corporate propaganda is precisely what it is. And while Ed Crooks is right that Chevron "replaced through discoveries 74 percent of the resources it produced over the past decade," another way of putting that is that Chevron failed to replace 26 percent of the oil it produced.

Who you gonna believe?

Oil company outlooks aren't real forecasts based on known projects and costs; they're simply projections of what those companies would like to happen, and would like you to believe. Ignoring the decline rates of mature fields, their own production declines, the costs of new production, and the price tolerance of consumers is the equivalent of a magician setting off a smoke bomb while he performs a trick. The latest outlooks from the likes of BP and ExxonMobil are just whistling past the graveyard.

To obtain a more realistic assessment of what the future of oil production might look like, one must estimate the remaining recoverable oil with some complicated "backdating" of discoveries, take into account the actual production history, and apply a lot of mathematical wizardry.

Fortunately Laherrère has done just that, to produce this three-century model (below) of global liquids production, including regular crude oil, natural gas liquids, extra-heavy oil, biofuels, and the kitchen sink.

(Source: Jean Laherrère, from a forthcoming paper)

Unfortunately, the quality of the data that anyone who attempts such a model must work with is poor. Only three countries publish reliable field data, Laherrère notes: the United Kingdom, the United States, and Norway. Without accurate field data, it's impossible to know what the future of oil looks like.

But after a decade of studying such data, I've come to regard Laherrère's work as some of the best in the world. It's highly transparent, and based on the best available sources. In this model, world liquid fuel production peaks before 2020 and begins its inevitable decline, while the forecasts of BP, IEA, EIA, and OPEC soar through 2040 and beyond.

So. Who you gonna believe? The oil majors or your own lyin' eyes?

Photo credit: gregor_y/Flickr

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Chris Nelder

Columnist (Energy)

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure