Oil and water

In early May a short item appeared in the financial press. The release was probably a page long but the subs reduced it to three or four lines—enough to say that the Bass Strait oil field had reached a milestone: it had 10 per cent oil remaining. Such treatment of the news was poor given the contribution the field has made to jobs, taxes, exports and royalties, but perhaps there were mixed feelings. After all, this was a kind of obituary—90 per cent of the Bass Strait oil has gone and the chances of finding anything like this again are very slim.

The previous week’s news may have had some bearing. Oil had hit US$58 a barrel, a 50 per cent jump on the previous year and 100 per cent higher than 2003. It was the highest price for 30 years and prompted the International Monetary Fund to call for urgent investment to prevent the price of oil doubling again. The Paris-based International Energy Agency said the same: oil production was not keeping pace with demand. Billions of dollars needed to be spent on oil exploration and now.

So, it was not the ideal moment to announce that Bass Strait was all but over. The news also tempted wider musings: the sediment of the Eocene and upper Cretaceous periods had been transformed into 3.5 billion barrels of concentrated energy over a 35-year period—just 30 per cent of the time cars have been manufactured at Dearborn, Illinois.

But why stress? We’ve found more oil and gas in other parts of the strait, and continue to find moderate amounts in the central basins and in WA. The numbers, however, aren’t big. The North West Shelf produces 0.1 per cent of annual world oil production. Surely we can always buy? There’s plenty of oil. The authoritative US Geological Survey (USGS) says there are just over one trillion barrels of various types of oil remaining world-wide, 60 per cent of which is to be found in the Middle East. This is sufficient to last 34 years at present demand. Of course, if we can reduce demand, the supplies will last longer.



At present the world uses 30 billion barrels each year. At the current global growth of 2–3 per cent we will need an extra nine–ten billion barrels (Gb) in five years. China is building eight-lane freeways; India too. China has 20 million vehicles already, increasing by two million a year. Saudi Arabia has generously promised to step up production to meet the gap, but it is hard to see how it can triple production, let alone quickly. There have been no big discoveries in the Middle East for years and the 68 big oil development projects currently under way in various parts of the world will only add 4.5 Gb. Many of these will take four years or more to commence production.

Still, the US, which uses 25 per cent of world oil, may yet get serious about conservation. There’s been a rush to buy hybrid cars, although most new-car buyers have just switched to scaled-down SUVs, rather than desert the gas-guzzlers completely. This may explain why US demand for oil rose one per cent last year. The US Congress is aware. In May it passed a Bill promoting the use of ethanol as a gasoline substitute although this doesn’t come into effect until 2008. Governor Schwarzenegger, a man who has seen some scary scenarios in his time, is at least doing something. His ‘hydrogen highways’ will offer 100 fuel stops for California’s minuscule number of hydrogen-fuelled cars, but a symbolic start is at least a start.

If that doesn’t prove enough comfort the USGS believes another trillion barrels of oil will be discovered, and a further trillion barrels of bituminous oil is to be had via the pitch and tar sands in Alberta, Venezuela, Estonia and Australia. This is not as good as it sounds as the cost of heating pitch to extract the lighter fractions tends to undermine the whole idea. Add the cost of the water involved and the pollution, and the exercise becomes pricey in more ways than one.

Another niggling thought is that the trillion that lies in wait for explorers sounds a bit neat. How do they know it’s actually there? Statistical modelling doesn’t create oil and it doesn’t allow for wild weather and bandits. We know that there’s a lot of oil potential in Colombia, but geologists also remember the kidnappings and murder. Iraq is supposed to have heaps of potential, but few are booking plane tickets just yet.

There’s also the reality that production is depletion; an obvious but often overlooked fact. If Bass Strait is in steady run-down might not this be true globally? Those early oil fields in Illinois and Pennsylvania have long vanished from memory. Cartoonists no longer draw oil shooting into the air when a Texan picks a carrot.
Texan oil began to flow in big volume in the 1920s as car numbers exploded, but peaked 50 years later in 1970. Alaskan oil consisted largely of one reservoir, Prudhoe Bay. Once production began to decline in 1988, Alaska’s big moment was over. The USA’s 510,000 wells yield about 14 barrels each per day on average. The North Sea, one of the most prolific discoveries since the Middle East, reached peak five years ago and now produces 20 per cent less than its peak production volume. Indonesia peaked 25 years ago. Yibal, Oman’s largest field, went into decline in 1997 after Shell discovered its high-intensity drilling program was depleting the field at a rate of 12 per cent a year.

The exception seems to be the Saudi and Gulf fields, the largest of which is still producing at an astonishing rate of five million barrels per day (mbpd) some 50 years since first production. This is comforting as it suggests there is still time to think of alternatives to oil as our main transport fuel. At least there would be time if it were not for the experience of the North Sea fields, Prudhoe Bay, Bass Strait, Yibal and the hundreds of fields already in decline.

After all, an oil field, even a Gulf one, is an oil field. There are all sorts of factors which determine the field’s viability including traps, faults, migration of oil and the porosity of rock. Essentially a reservoir is viable when the pressure from rock or gas above, or water below, pushes oil to the point of least resistance:
the well opening. In fields of good porosity and permeability no additional pressure is required for some years. It’s rather like unplugging a Li Lo; most air comes out of its own accord. Later on it’s a different story. Engineers must stimulate the reservoirs by injecting gas or water to push out the remaining oil hiding in the corners. This is common with small or older reservoirs. It certainly came as a surprise to oil financier Matthew Simmons when he discovered that most Saudi structures were under water injection and had been for years.

It should be said at once that Simmons is no greenie. He lives in Houston, helped draft the Bush-Cheney energy policy, is a loyal Republican and friend of James Baker III—lawyer to ‘big oil’ and former Secretary of State. Simmons is pro-oil, which explains his dismay when, suspicious of Saudi claims, he dug out dozens of engineering reports prepared for the national oil company Saudi-Aramco. The reports revealed that three or four of the big Saudi fields were in decline, or would soon be if not managed by water pressure. Ghawar the largest field, was being injected with seven mbpd of water to get out five mbpd of crude. This is an important field, the largest by far, representing 60 per cent of Saudi—and six per cent of world—supply. It was originally estimated to contain 60Gb and so far has produced 54 Gb. Saudi-Aramco now claims it originally contained 125Gb of recoverable oil. If 60 billion barrels is the more accurate assessment, we’ve got a global problem.

Hopefully Ghawar will not be a repeat of Oman’s Yibal field. Shell lifted Yibal’s reserve estimates by 40 per cent once it saw how well its intensive extraction was going. After many glowing press releases, Shell realised that rapid extraction didn’t mean more extractable oil over the long term. It could mean less. It revised estimated figures down 20 per cent, and with it went billions of dollars. The shares slumped and the chairman resigned. Simmons hopes he’s wrong, but if the Saudi fields have been hurried, several other Gulf fields may be in, or near, decline too. This means that world reserves figures are wrong.

Simmons came late to the debate. Some geologists and oil analysts have been saying for years that a proportion of the trillion barrels of measured global reserves is simply creative inventory, generated when the OPEC cartel decided to link production quota to stated reserves. The more you said you had, the more you were allowed to produce. The new extraction methods made this plausible, but open to abuse. Further, these reserves failed to diminish as the years passed. Like the Magic Pudding, Gulf oil seems to be cut-and-come-again. Dr Sadad al Husseini, a former vice-president of Aramco, is more pointed. He says the figures are ‘dangerously’ exaggerated. Dr Samsan Bakhtiari, a planner with the Iranian National Oil Company, believes they’re nonsense. 

Saudi-Aramco denies there is a problem. It admits the main section of Ghawar is 60 per cent depleted, but says that with other fields and more discoveries Saudi oil will flow for 70 years or more. Even if Ghawar can produce for another 50 years, it will bear a heavy production burden. About 20 per cent of the world’s oil comes from 14–15 major fields. Many are diminishing, but depletion rates are not well publicised. A conservative estimate is a rate of three per cent per annum. If demand increases at two per cent per annum and the base reserve is reduced by three per cent per annum, then an additional five per cent volume is required each year. This represents a lot of discoveries and in quick time.

Oil exploration is a tough line of work. You can have a run of dry holes, drill bits get stuck, there are storms, sand and sleet. Currently there is a shortage of rigs, drilling ships, geologists and drill operators. This is why the oil sceptics are bemused by those who think discovery is directly related to the oil price. True, price is a big incentive, but strangely enough the big oil companies are using almost as much of their boom-price profits on takeovers than they are on exploration. The reason? It is far easier to add reserves to your portfolio than undertake exploration. When each hole costs millions, why take unnecessary risks? New techniques like 3D seismic exploration are astonishing, but exploration and development involve years, not months. One hundred years after the ready availability of Texan oil, the new leads lie either in previously unexplored territory, or offshore, where the costs of drilling can be ten times that of onshore extraction.

Despite some very big gas discoveries in recent years, the rate of oil discovery is slowing decade by decade. Estimates range from a conservative 50 per cent replacement to a discovery rate as low as 25 per cent. And all figures must be reliable, not PR versions rounded up to please the energy minister or to entice investors.

Whatever the technicalities, there are questionable assumptions supporting the Western economic system. We drive to work, church and school, only vaguely aware there is an issue. Petrol at $2 a litre might be cause for complaint in Australia, but for others it is life-changing. In a shanty town, kerosene may be the only fuel available. Indonesian subsidies for cooking kerosene represent a serious strain on the national budget. America may be able to fend for itself, but in just two years its oil import bill has risen an extra US$90 billion. At best we are about to enter a world in which the price of oil becomes more volatile. At worst, the price may exceed US$100 per barrel, as Simmons privately believes it will.

One day we might even come to regard oil with the respect we are only just according water. It has taken the global community a long time to see water not simply as an engineering problem, but one with ethical and moral implications. Politicians are now happy to be seen frowning as they walk beside the inland drain we call the Murray River. Some have even grasped that old communal morality motto of doing unto the downstream what you would have the upstream do unto you.

It will take time before we regard oil in a similar way. At present it is treated like a lotto win for those few governments lucky enough to play host to the resource, but in terms of nation building and the needs of successive generations, it is a brief moment; a moment often squandered. So whether we are one, two or ten years away from a global production peak is almost irrelevant. It may be two years before oil is scarce; it may be five if peace comes quickly to Iraq and Middle East tensions fall. The oil price will fluctuate, but inexorably demand is rising and inventory falling. In the meantime we seem loath to pay much attention to our future. As Simmons says, ‘There’s no Plan B.’ For some reason shanty dwellers don’t count, nor even our grandchildren.       

Richard Campbell is a Melbourne-based securities adviser who takes an interest in oil and his grandchildren.

 

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