The Oil Plateau and the Precipice Beyond

June 1, 2010 § Leave a comment

I’m certainly not the first to raise the specter of an oil plateau. This is not the same as Peak Oil, although there are similarities.

The first intimation of the concept was by Christophe de Margerie, the CEO of Total S.A., based in France, who first described this issue back in the fall of 2007. Subsequently PFC Energy went public with their research.

de Margerie’s statement made quite a splash. Here was one of the top five oil companies in the world, and the CEO was saying there’s a plateau coming. He put the plateau at 100m barrels a day. At that time the world was producing about 85m.

After that I personally, publicly asked a CEO of a major oil company to comment on de Margerie’s prediction. He acknowledged the plateau was real. He said, “I’m not sure I’m going to subscribe to the 100 number, but there’s a plateau coming.”

Shortly before that I spoke to the head of the the French Petroleum Institute (IFP), and they confirmed that their modeling showed the same thing. They pegged it at a somewhat lower number.

So here we have substantial people saying there’s a plateau coming and yet nobody acknowledges it publicly. Nobody wants to discuss it. Nobody really wants to act on it.

Causes

Now you’ll ask the reasons for the plateau. First of all there is a technical model thatpredicts a plateau, courtesy of PFC Energy in DC, but if you want to speak conversationally, the reasons are multifarious.

For example, national oil companies have realized they have a resource they need to husband. International oil companies used to move in and extract oil via Production Sharing Contracts, which made the incentive to get the most oil out as quickly as possible.

There’s a truism in oil and gas production: if you extract the petroleum quickly, then the net recovery, that is the fraction of fluid in the reservoir that is ever recovered, reduces. When the international oil companies went into these nations, they were drawing as quickly as they could because their contracts ended in X years. That was not in the best interest of the national resource.

Increasingly, the nations have figured that out. Now they are forcing the issue, telling the international oil companies, “We’ll do it ourselves. We don’t need you.” The key point is they want to bleed the oil out in a more measured fashion. Guess what that does to production rates?

Most of the major oil companies like Exxon are therefore forced to seek unconventional sources of oil — for example, Canada’s Tar Sands — which are largely heavy oil. Additionally, now the Tar Sands may get a carbon tax.

Then you’ve got Matt Simmons, a highly respected figure in oil and gas investment circles, who says Saudi Arabia will not be able to open the spigots: that they don’t have the oil.

The fact of the matter probably is that the Saudis have the oil, but they’ve got a different view of it now and how to release it. They have been the leaders in the application of technologies to maximize recoveries.  They’re not going to get bullied into releasing it faster just because the world wants a lower price on oil. People thought of Saudi as the buffer, that they’d just open the dams, but it just doesn’t seem like they will. Matt Simmons takes the position that they can’t. It’s irrelevant: they won’t. Whether they can’t or won’t compensate shortfalls elsewhere in the world, it comes to the same thing: they won’t.

Consumption versus Production

The estimated plateau of 95 million barrels a day — I think PFC at this point is talking about 90-92 million barrels a day — comes dangerously close to the 87 million barrels we’re supposedly consuming. I say supposedly because I think current consumption has dropped. In this country we decreased consumption from 21 to 16 million barrels a day from one year to the next. The decreased consumption is not going to last: we’ll become profligate again.

Consumption is the key to determining the impact of the plateau. Where is the point where consumption and production cross? If in fact the plateau is there, and in fact economic recovery is coming (which it is), and you base your models on consumption and PFC Energy estimates of 1.5% annual growth in oil usage, the crossover comes in 2020.

The key factor is the speed of the recovery with respect to automotive use. In the United States at least, oil is about transportation. Gas is about power and petrochemicals. The plateau is real and the recovery is real. It’s very real in China and India, which never really saw much of a recession. In China and India what do you think a newly prosperous person does? They buy a vehicle. They go from a bicycle to a motorcycle to a car. Everything consumes fuel except the bicycle.

There are statistics on per capita automotive usage in these countries versus the so-called advanced countries and it is staggeringly different. All of this says that transport fuel usage is likely to keep increasing, and that if it does, the crossover point between consumption and production is probably sooner than later (I’m not talking electricity — that’s a completely different argument).

If you want to reduce consumption of oil, you’ve got to switch transport fuels. People say very silly things about oil prices and imported oil juxtaposed to wind and solar. There’s no meaning there. The only meaning will come years from now when electric vehicles are a significant fraction of active automobiles.
The plateau is coming and if consumption continues at the current rate, there is a crossover coming. And at the point of the crossover, we’re not talking a spike in prices. We’re talking a sustained price increase. A spike is driven by a shortage at some point. This is not a shortage at some point. This is a plateau.

But let me end on a very simple point: do you really want to test the plateau theory? The alternative to testing it is doing something smart, like replacing oil with something that is more environmentally responsible. Are you going to argue with me about models, or are you going to do something that’s right to do anyway? Let’s just do the right thing, especially if it also happens to ameliorate, and in the limit, nullify, the plateau problem.

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