Surging Oil Industry Brings Opportunity To Rural California

The idea that global oil production was nearing its peak, only to plateau and then decline was a common view in the energy world for many years. The geophysicist M. King Hubbert predicted in the 1950’s that US oil production would peak in the 1970’s, a forecast that held true until technology allowed companies to economically extract oil and gas from tight geologic formations like shale.

The recent surge in US liquids output – crude plus natural gas liquids (NGLs) – quieted the peak oil community. A well-known, largely peak oil-focused website – The Oil Drum – shut down in 2013, an event some considered the death knell of the peak oil theory.

But not so fast says Steven Kopits from energy business analysis firm Douglas-Westwood. Total global oil supply growth since 2005 – 5.8 million barrels per day – came from unconventional sources, shale oil and NGLs in particular, Kopits recently told the audience at Columbia University’s Center on Global Energy Policy.

“Not only US, but global, oil supply growth is entirely leveraged to unconventionals right now,” and the legacy, conventional system still peaked in 2005, he said. This gets a bit technical, as shale oil and liquids produced with natural gas are fed into the main crude oil stream and priced as such. But the strong degree to which increasing oil supply growth is dependent on unconventional sources is important to remember and often gets lost in the exuberance over top-line output figures.

And despite prolific incremental oil and gas production made possible by hydraulic fracturing and horizontal drilling advances, maintaining legacy production has been expensive and arguably of limited success.

Total upstream spend since 2005 has been $4 trillion, of which $350 billion was spent on US and Canadian unconventional oil and gas, with an additional $150 billion spent on LNG and GTL, according to Kopits’ presentation. About $2.5 trillion was spent on legacy crude oil production, which still accounts for about 93% of today’s total liquids supply. And despite that hefty investment, legacy oil production has declined by 1 mmb/d since 2005, said Kopits.

By comparison, between 1998 and 2005 the industry spent $1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. The industry “vaporized the GDP of Italy,” with its $2.5 trillion upstream spending for oil since 2005, which barely maintained the legacy oil production system. Kopits argues this level of investment by the major oil companies appears unsustainable, and the major’s current cost structure is troublesome.

Collective oil production of the world’s largest listed oil companies has faltered, while upstream capex soared, Kopits said. Profits have suffered because costs are rising faster than revenues in a range-bound crude oil price environment. “E&P capex per barrel has been rising at 11% per year,” he said, but Brent oil prices have largely been flat. As a result, Chevron, ExxonMobil, Statoil and BP all recently put major projects on hold or cancelled them outright.

“If your costs are rising faster than your revenues, do you sell your assets? The majors have been doing this, but is it sustainable?” asked Kopits. The industry was able to maintain conventional crude oil production levels by throwing $2 trillion dollars at the system – essentially “putting it on steroids” – but now that’s run its course and capex is being curtailed, a trend that looks set to continue, in his view.

Comments

  • Shawn Aune

    “…until technology allowed companies to economically extract oil and gas from tight geologic formations like shale.”

    Technically speaking, the technology has been available for decades. The only reason it has led to increased production numbers recently is the recent quadrupling of the price of oil.

    It was the economy that evolved, not the technology.

  • Mason Inman

    There’s a typo in the story. It was “M. King Hubbert” (with ert at the end, not ard). It’s a common mistake.

    For anyone who’s interested in Hubbert and the history of oil forecasts, my biography of Hubbert is coming out from W. W. Norton in the next year or so. You can sign up for updates at my website, oracleofoil.com

  • http://www.olduvaiblog.wordpress.com/ Steve

    I wouldn’t consider Peak Oil a theory. It is based on the observation that any finite resource will reach a point when production can no longer be sustained. This cessation of production increases is due to a number of factors: finiteness of the resource and human proclivity to use the cheapest and easiest-to-retrieve sources first. As the quality of the resource diminishes it costs more to acquire: diminishing marginal returns.
    Peak Oil is that point when production has gone as high as it ever can and will begin to decline. Peak Oil experts suggest that we should experience a bumpy plateau for a short time after reaching peak and then begin to experience ever lower production. Considering the fact that we seem to have reached peak crude oil production in 2005, it is only a matter of time before we experience total liquid oil peak (we’re exploiting the expensive, hard-to-retrieve sources currently to supplement declining conventional crude).
    The implications of Peak Oil are monumentous for global industrial civilisation. And not in a good way.
    http://www.olduvaiblog.wordpress.com

  • http://MrEnergyCzar.com/ MrEnergyCzar

    The bottom of the barrel is costly, dirty and down right ugly….

  • thoughtchallenge

    The desire for quick profits has driven the oil market to this point. We could now see a reversal in which, the oil companies choose slower, but lower cost production practices. The reward for their wait: higher oil prices as global supplies dwindle.

  • Maarten van Mourik

    the issue is not peak oil as such at this point. it is more peak profitable oil in the face of what the economy can bear. this situation has been in the making for nearly two decades and the last 10 years or so have seen an acceleration to and past break-point. Cheap money has been used to get expensive oil. But cheap money has also eroded the buying power of the demand side of the market. The economy cannot grow without cheap fuel as an input and the oil will not be produced without a profit. Current cash flow trends point to a deteriorating situation for Big Oil and Shale oil alike. Companies will react and the oil supply is likely to stagnate. Price becomes volatile once more. Who cares? Nobody, except the consumer. Only a sustained high oil price will get reactions away from oil. Who would like that to happen? Nobody. Keeping the oil price in the ‘sweet spot’ will be difficult, if not downright impossible. At the current rate, demand will be killed due to falling disposable income, without reaching a real solution to the energy issue at hand. But then again, what government would like to see the price fall and then see tax revenues fall too? check our book: the misunderstood crisis, published in January 2014, http://www.misunderstoodcrisis.com

  • Mad Max

    This is why it is called the Long Emergency! Those psychopaths are trying to maintain a system that has already died, and will probably kill themselves for it.