The Coming Oil Crisis by C. J. Campbell

Chapter 15
SYNTHESIS — WHAT IT ALL AMOUNTS TO

Campbell’s is the best book BY FAR on oil depletion, read
THE COMING OIL CRISIS, by C. J. Campbell;
Multi-Science Publishing Company & Petroconsultants, 1997
ISBN 0906522110
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If you have come this far, you deserve a medal. If you have simply browsed, that will have served its purpose too if it has prompted you to think more about the implications of depleting a finite resource and the coming production peak. We are not used to depleting things, being confident that we can always run into the supermarket and replenish our stocks. And, we prefer not to think about the end of the one finite resource we do know about only too well: our own life-span. But in the 21st Century, we will come to experience the virtual depletion of oil, an energy source that has become central to our way of life. We will have to change the way we live. It is not too soon to start thinking about what that may entail.

In this last chapter, I will try to sum up the message of this book.

THE FORMATION AND ENTRAPMENT OF OIL AND GAS

Oil is derived for algae that proliferated from time to time in the Earth’s long geological history. Gas comes from plant remains and is more widely distributed. On death, the organic material sank to the bed of the sea or lake from which it was derived, or was washed in from the surrounding land. In most cases, it was dissolved or destroyed, and only rarely in stagnant troughs was it preserved and concentrated. The resulting organic-rich layers were buried by other sediments, and with further subsidence became heated by the Earth’s heat-flow. After a critical exposure to heat, the organic material was converted to oil and gas by chemical reactions. It is obvious why the circumstances for prolific oil generation occurred so rarely. The conditions for generation normally lie at depths of 2000 to 5000 m. There is not much oil to be found deeper.

Once formed, petroleum, whether consisting of oil or gas, which is under great underground pressure, begins to migrate upwards through the rocks in hair-line fractures until a porous and permeable layer, such as a sandstone, is encountered. It then follows the conduit, floating on the water that fills the pores. If the conduit leads straight to the surface, the petroleum will escape to the atmosphere. But in most geological basins, the rocks have been folded and faulted by earth movements. In such cases, the petroleum collects in the highest part of the folds or up against faults. It is contained in porous rocks, but will leak out over time unless well sealed by overlying impermeable strata, such as clay or salt. Much of the oil, that was once formed, has escaped. Older rocks therefore become less prospective because they have been exposed to leakage for longer.

Much of the petroleum is trapped in the cracks and crevices of the migration paths along which it moves, and much is lost at the surface. So only about one percent of the amount generated finds its way into traps that are large enough to be exploited. Oil accumulations at shallow depth on the margins of basins are oxidized and attacked by bacteria becoming tar and heavy viscous oil. Oil that is overheated on being buried too deeply is cracked to gas.

Gas contains dissolved liquid hydrocarbons that condense at the surface, and can be extracted by processing, being known as Condensate and Natural Gas Liquids. Oil also contains dissolved gas, which may separate out in the reservoir to from a gas-cap over an oil accumulation.

EXPLORATION

In earlier years, geologists searched the world for seepages of oil at the surface, and looked for promising structures in the vicinity to trap it. They found most of the prolific basins and many of the giant fields in this way.

Later, seismic surveys were developed to explore the subsurface. The technique involves the release of energy from an explosive charge, or in other ways, at the surface, and recording the echoes reflected back from rock interfaces far underground. By computing the time taken for the echo to return, it is possible to calculate the depth and configuration of the buried structures.

The offshore was opened after the Second World War, and marine seismic surveys were perfected, such that it became possible to map the continental shelves rapidly and inexpensively. Technological progress has greatly improved the resolution of seismic surveys, and the computer work-station has brought enormous computing power to the interpretation. Geologists and geophysicists can now investigate the oil zones in great detail, searching for thin and subtle reservoirs and finding ever smaller traps. Exploration boreholes, known as wildcats, are drilled to test the geological interpretations and gather information. The technology of drilling has made enormous progress, such that it has become routine to drill 5000 m wells in the stormy waters of the North Sea. The process involves drilling a large diameter hole from the surface, commonly 30 inches in diameter, and then cementing steel casing into it to seal off the formations. The size of hole is progressively reduced and cased off. The drill string with a bit on the end of it rotates to make the hole, and a special mud, weighted up with the heavy mineral, barytes, is pumped through the drill string to lubricate the bit and remove the cuttings. The trick in drilling is to match the mud weight against the formation pressure: if it is too high, the mud escapes into the formation; if it is too low the formation encroaches on the well and causes the bit to stick.

Geologists examine the cuttings brought to the surface in the mudstream to identify the rocks the borehole is penetrating. Cores are taken where necessary. Sondes are also lowered down the borehole to record the electrical and radioactive properties of the rocks, making it possible to identify different rock types, measure porosity and determine which zones are oil or gas bearing.

The breakthrough offshore came with the development of the semi-submersible rig, in which a platform holding the drilling derrick is mounted on two submerged pontoons that lie beneath the wave base, providing a stable structure relatively unaffected by the weather.

Other important developments have been to find ways to drill highly deviated wells to reach far out from the platform. In extreme cases, the wellbore may be 90 degrees or more from the vertical. It can track a thin productive zone, which can be drained rapidly. Also, a single well may have several branches at depth. Various techniques to improve the permeability of the reservoir can be applied, such as injecting acid or fracturing it by injecting fluid under very high pressure.

To produce an oil zone, it is necessary to first seal it off from the overlying and underlying strata, and then let off explosive charges in the well to pierce holes in the casing. Normally, there is sufficient pressure in the reservoir to cause the oil to flow to the surface, although sometimes it has to be pumped.

In short, advances in technology have made exploration and production highly efficient. The geological processes responsible for oil accumulation are now very well understood. Of particular importance was the geochemical breakthrough of the 1980s that made it possible to identify and map the zones generating oil and gas. It not only showed which trends had potential but it allowed large tracts to be written off as non-prospective, once the critical information had been gathered.

RESERVE ESTIMATION

Before a wildcat is drilled, the geologists and engineers have to estimate the likely reserves of the prospect to determine if it has the potential to be commercially viable.

They map the volume of the trap. using seismic data and applying their best estimate of the likely reservoir conditions. The first well will reveal whether or not it is oil or gas bearing as well as much more information about the reservoir, but it is usually necessary to drill several appraisal wells to confirm the estimates.

There remains a range of uncertainty, the Median Probability case gives the best estimate of what is actually producible. However, for the purposes of planning the investment and in raising the finance, it is normal to take a more conservative Low Case estimate with a probability ranking of about 90 percent, and term the reserves Proved Reserves. This number is used for financial reporting purposes, and is the one normally recorded for official statistics. This so-called Proved conservative estimate is naturally subject to upward revision over the life of the field: the increase being termed reserve growth. It is, however, widely misunderstood, being taken as a dynamic akin to exploration, driven by improved technology, when in fact it is little more than the natural evolution from a Low to a Median Case estimate.

While, the reserves of a field will be known absolutely only on the day when it is finally abandoned, at which point they equate with the Cumulative Production, the estimation of reserves is a straightforward procedure in technical terms. The reporting of reserves is, by contrast, a political act reflecting more the needs of the reporting authority than the actual situation. In the absence of clear universal definitions, reporting procedures or audit, there is plenty of scope for latitude in reserve reporting. In part, companies treat reserves as a form of inventory which they book as best meets their financial and commercial needs.

Government statistics are often unreliable: the greatest distortion arising from the exaggeration of reserves by several OPEC countries in the late 1980s in order to secure higher production quotas.

CATEGORIES OF OIL

We may broadly classify oil into conventional and nonconventional categories. Most of the oil produced to date, as well as most to be produced over the next few decades, can be called conventional. It has a characteristic depletion profile with production starting at zero, and rising rapidly to one or more peaks before declining exponentially.

In addition, there are large amounts of what can be collectively termed non-conventional oil. It is made up of heavy oil and tar; oil dependent on enhanced recovery techniques that change its fluid properties in the reservoir by such methods as steam injection; oil in hostile environments; oil from late-stage infill drilling to tap small pockets missed by the primary wells; and oil in accumulations too small to be viable exploration targets. It has a different depletion profile, rising only slowly to a long low plateau before eventually declining in the far future. Although the boundary between the two categories may be blurred, it is very important to make the fundamental distinction.

Natural Gas Liquids are another source of confusion in the statistics. They should be separated from oil because they relate to the gas domain, but in practice are often lumped together, being in some cases pumped through the same pipeline and metered together.

What concerns us most is when the production of Conventional oil will peak, because it is then that shortages of the cheap oil-based energy, on which our economy is based, will begin to appear. Non-conventional oil may well become important in the distant future. Some is already in production at today’s prices, but the amounts are unlikely to be significant for a long time, if ever. Imagine having to drill patterns of five closely spaced wells, and inject steam into the peripheral wells to drive a little heavy oil out of the central well until it drains that area, and then move on to the next grid unit. It can be done and it may even make a profit, but the sheer scale of the operation is daunting. Imagine too the processing to convert this oil, which often has a high sulphur content, into a usable product. A great deal of energy is used making the steam, and the whole thing is damaging to the environment. It is critically important to distinguish this kind of activity from conventional oil production. Many of the high reserve estimates that are published fail to distinguish the two categories and give very misleading impressions.

HOW MUCH HAS BEEN FOUND AND WHEN

The search for oil has been going on for almost 150 years. During this time, almost everything that there is to know about the geological conditions responsible for it has been learnt. The World accessible to the international industry has been very thoroughly explored. Large parts of the World, made up of ancient shields, or oceanic rocks, are absolutely non-prospective. Almost all potential basins have now been identified, and investigated to some degree by seismic means and drilling. It is almost inconceivable that any new significant province remains to be discovered.

There are certain new tracts in very hostile environments that are under-evaluated, such as in Antarctica, the Falkland shelf, the Greenland icecap, off Iceland, and in several Arctic provinces. There is no particular reason to think that they are oil-bearing, still less that they can yield any significant amount. We can treat much of such notional oil as may be attributable to them as non-conventional insofar as it is in any event out of range for a long time to come.

The prospects in the Former Soviet Union and China are not well known in the West. This ignorance has tempted some to attribute a large undiscovered potential to these areas. I think that the Soviet explorers were certainly as intelligent as their western counterparts, and the systematic exploration of the Soviet system was probably efficient. It is said that oil is found in the head of the geologist, and I think that Russian heads were no thicker than ours. Their technology may not have been as advanced, but most of the oil in the West was found long ago when technology was even less advanced. I therefore think that all the large productive basins have been found as well as most of the giant fields. There is however certainly scope to extend known trends offshore into the Caspian which was not investigated by the Soviets. The giant Tengiz Field with 8 Gb of reserves in a Devonian reef beneath an effective salt seal lies on the shores of the northern Caspian and provides encouragement for exploration in the adjoinging waters, although there is a danger that with deeper burial the oil has been cracked to gas. There may be some scope left in very remote places like the Tarim Basin in the interior of China but again such oil is nudging the non-conventional.

Most deep and very deep water areas are non-prospective for geological reasons, but there may be a few new areas like the deep Gulf of Mexico or offshore Nigeria and Angola yet to bring in. It is however unlikely to be any great bonanza, even if now technologically feasible.

Figure 15-1 provides the essential data on discovery, showing that 784 billion barrels have been produced and that estimated median probability reserves from known fields stand at 836 billion barrels. Together, they add to a total discovery of 1.6 trillion barrels. This estimate of reserves excludes Natural Gas Liquids, and is respectively about 180 and 270 billion barrels lower than the numbers reported in industry journals¹. The reason for the difference is that many countries, including Mexico and several large OPEC producers have released unreliable data and/or included non-conventional oil.

Fig. 15-1. The World’s conventional oil endowment.

Fig. 15-2. Giant discovery.

About sixty percent of what has been discovered lies in just over three hundred giant fields, many in the Middle East. Peak giant discovery was in the 1960s, and the discovery rate has fallen dramatically in recent years, see Figure 15-2.

Discovery as a whole also peaked in the 1960s being heavily influenced by the contribution of giant fields. More and more fields are being found but the average size is falling.

HOW MUCH REMAINS

The sum of the Reserves and the Yet-to-Find gives how much remains to produce. Put in other terms, it is Cumulative Production when it ends (namely Ultimate recovery) less Cumulative Production to-date.

Estimating how much is yet-to-find is not easy, but nor is it quite as difficult as it was. The World has been so extensively explored that we can be sure that almost all, if not all, of its prolific basins have now been identified. The bulk of what remains to be found lies in ever smaller fields within the established provinces.

We can estimate this amount by old-fashioned geological judgment relating the maturity of exploration with the underlying geology, and there is now sufficient data to use statistical approaches.

When the first well is drilled in a basin, nothing is known about the ultimate distribution of field size, but when the last well is drilled everything will be known. As we get close to the finishing line, we can begin to see it clearly.

Jean Laherrere has discovered a law of distribution stating that objects in a natural domain plot as a parabola when their size is compared with their rank on a log-log format. For example, the populations of the larger towns can be plotted to yield the population of a country down to the smallest settlement. It means that when the larger oilfields in a basin have been found, their size distribution can be used to predict what the Ultimate recovery will be. The difference between this and what has been discovered gives the Yet-to-Find.

Another approach is to plot cumulative discovery against the wildcats drilled. The plot is generally hyperbolic with the larger fields found first, and the asymptote equates with Ultimate recovery. Cumulative discovery may also be plotted over time.

Lastly, production peaks can be correlated with their related discovery peaks and extrapolated to zero, giving an indication of how much is yet to produce.

It is a case of using all of these techniques, as well as judgment, to come up with the best estimate, remembering always to distinguish conventional oil from non conventional oil.

My best estimate computes that there are 180 billion barrels yet-to-find. One could round it to 200, but it is better to keep the exact number as calculated so that things add up properly. With reserves of 836 billion barrels, it means that there is a rounded one trillion barrels of yet-to-produce.

The distribution of the yet-to-produce is most uneven: about half of it lies in just five Middle East countries. The ten largest countries hold three-quarters of it.

PRODUCING WHAT REMAINS

The production of any finite commodity starts at zero, rises to one of more peaks and ends at zero. Think of your lifetime spending pattern: you spend little in the cradle or the coffin, but have several peaks around middle age. It is the same with oil production in a country. peak comes around the midpoint of depletion. It could come a little before midpoint if there are a lot of giant fields found early; or it could come after midpoint if peak production were artificially restricted by prorating or quota. But the general coincidence of peak and depletion midpoint is valid for both theoretical and empirical reasons.

PRODUCTION SCENARIOS
1800 Gb Ultimate

Fig. 15-3. Production profiles.

Most countries are now either past midpoint or close to it, except the United States which is far past it and the five Middle East countries which are far from it.

It means that the producing countries of the world can be divided into those past midpoint where production is set to continue to decline, and those which have not yet reached it where production can still increase. We may further consider the five Middle East countries as an extreme category of the pre-midpoint group, because their yet-to-produce is so large and the depletion rate so low. They can behave as swing producers, making up the difference between world demand and what the others can produce. This swing role can, however, apply only for a number of critical years before they too reach their midpoint. The swing producers are likely to control both the level of production and the price of oil.

SCENARIOS

World demand for oil rose rapidly until the 1970s, when it briefly declined before again beginning to increase at a slow rate. Most forecasters now predict rising demand, driven by the expanding economies of the East and the growing population. It is currently rising at just above two percent a year, the International Energy Agency predicting an increase of 2.5% in 1997.

One can envisage a large number of alternative scenarios of supply and demand, but here we will be content with three, hoping that they will encompass in their spectrum the actual course of events. They all envisage a radical increase in the price of oil when the swing producers exercise their control. This price constraint is expected to lead to a plateau of production for a certain period of time before the resource constraints drive production down.

The base case scenario envisages that production rises at a conservative 2% a year until the swing producers control thirty percent of the world market, which will be in 1998 under this model. If production rises faster, as now seems quite possible, the thirty percent threshold will be reached sooner. Prices then increase by a factor of two or three, which curbs demand, giving a plateau of production at 67 Mb/d until 2008. Plateau may not be the right word because there will be many ridges and valleys in a very volatile market. It is expected to end when the swing share has risen to about fifty percent. It is assumed that there will then be physical shortage probably accompanied by a further radical increase in price. Production will then start to decline at the then world depletion rate.

SHOCK

In an ideal world, governments would properly study the resource base and understand the principles of depletion. They do not, and in democratic societies cannot, because they are elected for short terms and are therefore motivated to deliver short-term benefits to their electors. As a consequence, it is most unlikely that the governments of either the United States or the European Union will adopt an energy policy with the aim of preparing for the inevitable peak in oil production and subsequent scarcity.

It will therefore be left to the Middle East producers to alert the World to its predicament. They wont do so for an altruistic purpose, but simply to raise their revenues. Motive apart, their action will carry an important message. I don’t think that their message will be delivered in small doses, nor can it be, given the efficiency of the new oil commodity markets. It will be the marginal barrel that sets the price. Quite a small shortfall could trigger a strong reaction. There will be nothing to counter it: oil will suddenly be in strong demand and the traders will hourly mark up its price as more buyers than sellers appear in the bullpen. Probably, as prices rise the buyers would at first hold back, but since their physical stocks are now so low, they could not do so for long. The market would move into contango whereby the futures would be above the present. That itself would deliver a message, which the sellers would pick up, holding back on physical delivery. It would spiral upwards as a crisis feeding on itself. Where would it end?

POST-SHOCK

The epoch immediately following the shock will likely see great volatility. There will be no shortage of comment, informed or otherwise, and it will be a field day for radio and television panel discussions. Mr Clinton may launch a few more missiles at someone. He might send in the marines to occupy Saudi Arabia. But it would all be posturing and gesture. If Exxon, backed by the marines, found itself controlling the world’s oil supply, what would it do? Put up the price.

There would be a flurry of new exploration in the hope that old solutions would again come to the rescue: they won’t.

But gradually, the realities will filter through. The Third World will be hit first: their oil-based energy consumption will begin to falter. We already have an example of what happened to Cuba when cheap Russian imports ended with the collapse of Communism.

“Cuba has become an undeveloped country. Bicycles are replacing automobiles. Horse-drawn carts are replacing delivery trucks. Oxen are replacing tractors. Factories are shut down and urban industrial workers resettled in rural areas to engage in labour intensive agriculture. Food consumption is shifting from meat and processed products to potatoes, bananas and other staples” ²

It won’t be so rosy in the developed world either.

A permanent doubling or more in the price of oil, followed by growing physical shortages, must lead to a major economic and political discontinuity in the way the world lives. It heralds the end of rampant and mindless consumerism in the more developed countries, and will bring great suffering to the Third World.

Every effort will be made to find alternative and renewable sources of energy. Nuclear power will be increased, although not fast enough to deal with the crisis. It will itself later become resource constrained by the finite quantities of uranium. Coal mining will be stepped up with adverse environmental consequences, especially in places like China where the power stations lack adequate smoke filters. The use of renewable energy will expand rapidly and successfully.

The greatest progress will however have to be made in terms of using less. The World will become a very different place with a smaller population. The transition will be difficult, and for some catastrophic, but at the end of the day the world may be a better and more sustainable place.

That seems to be a logical interpretation, but is it the correct one? I don’t know, but I hope that the discussion which you have so patiently read will prompt you to think about it. I further hope that, having thought about it, you will make some provisions to protect yourselves as well as you can. I have discussed it with my broker, but I have to admit that we do not know what to do.

NOTES

(For references, see Bibliography)

1. Oil and Gas Journal and World Oil.

2. Falcoff, 1995, quoting Preeg & Levine, 1993.