Jim Buckee, Talisman Energy: “Peak Oil and Resource Nationalism“

• World oil field sizes: the top three fields (Ghawar, Burgan, Cantarell) are huge compared to everything else. Ghawar is unknown, but the other two are in decline.
• 97% of the world’s known reserves are in 10% of the fields.
• Prudhoe Bay (and indeed all fields) go into exponential decline.
• Samotlor, Forties, West Texas – all in terminal decline. [Charts showing numerous fields in terminal decline.]
• On average, fields decline after 50% has been produced, on average decline at 10% pa. Depends on quality of the reservoir, facility constraints, etc.
• Demand growth 1.5% pa. World decline: 5-7% pa. Decline will be 50-60 mpbd in 10 years (6 Saudi Arabias).
• [Numerous detailed maps and charts on Saudi oil fields…Abqaiq is good, north Ghawar is good, but south Ghawar is bad.]
• Ghawar 174 x 16 miles…190 bn bbls OOIP (assuming 60% recovery factor). Reserves 80-90 bn bbls… 5 mbpd current production.
• Cantarell…massive decline rate
• Sadad al Husseini: “natural declines in existing capacity are real,” getting KSA to 12 mbpd of production would “wreak havoc within a decade.”
• Chairman Farouk Al-Zanki: Burgan “peak output in 2007 at 1.7 mbpd not 2″…reserve uncertainty
• Daqing (16 bn bbls): liquids 3% decline
• Alternatives: rate vs. volume. World NGL production will peak in 2010-11 (over 9 mbpd)
• World XTL (anything-to-liquids)…peaks at 2.5 mbpd in 2012.
• If conventional oil reserves are 750-1000 bn bbls, decline is 50-60 mbpd over 10 years. NGLs (probable), yet to find (10-20bn bbls), EOR, plus bitumen/extra heavy all together equals about 300 bn bbls, and can’t make up for conventional decline.
• Why Majors are quiet on peak oil:
  • In a big company, CEOs are advised by economists: “commodities always go down,” “ingenuity overcomes scarcity,” …Club of Rome, Malthus cast ridicule on scarcity arguments
  • “There is plenty of oil we could get at it” - ignores volume vs rate argument!
  • “Low cost producer wins” – true but opportunity missed.
  • Political implications? Heavy implications!
  • There are signs of change: “end of cheap oil”
  • Predicting oil price is difficult
• Industry Outlook
  • Exploration is tough – F&D [finding & development cost] is rising
  • Industry is extremely tight: people, services, equipment
  • Costs have doubled in the past 3-4 years
  • Industry fights declines every day
  • No opposite of a train wreck. Things don’t suddenly get better than they have been.
• Resource nationalism is rampant!
  • Host gov’ts want sovereignty and control, not tax collection. Also a rebalancing of power and status with the West.
  • Mineral resources deplete – finite pie to cut up
  • Not limited to OPEC!
  • But oil in the ground has no value!
  • Governments should maximize value…leave some in the ground
• Various slides on the share of revenues depending on the PSCs [production sharing contracts]
• Resource nationalism
  • IOC [independent oil company] motivation is to grow production, reserves, hence revenue
  • But host government motivation is more complex
  • How much money is enough? An empty purse is bad but in high prices other factors play
  • Do mechanisms exist to spend money usefully?
  • What to do with petrodollars?
  • Oil as a weapon (Venezuela, Russia, etc.)
• Current account balances are terrible for India, China, etc., and are huge for Venezuela, Libya, etc. Remaining fields with access to outside investors have extremely low financial returns.
• Rise of the NOCs [national oil companies]
  • Libya takes 55% from Oxy
  • Shah takes 55% from Anglo Persian
  • Venezuela takes 60%
  • KPC took over Gulf Oil, etc.
• Majors are rather minor in terms of reserves! Exxon, the largest of the “majors” is only #17 worldwide in terms of reserves!
• Rise of the International NOCs (INOCs): Statoil, Yukos, BP-TNK, etc. Benchmarking and chest thumping. ONGC, CNPC, Sinopec, CNOOC etc. are serious competitors.
• NOCs have problems
  • Uneasy relationship between NOC and government
  • Often used as a piggybank by gov’t, starving reinvestment (Pemex, Petronas)
  • Upper echelons often choose other than by merit
  • Corruption – money siphoned off
  • Contract and sourcing sub-optimal
  • NOCs reflect the national culture…deference, unwillingness to say no, promotion by status or age, bad news messenger gets shot…
  • Inefficient: $15.28 revenue per barrel for IOC vs. $5.25 for NOC
• Exports fall faster than production. Population growth, food prices, subsidies for fuels, etc. In Indonesia, subsidies are 30% of the state budget!
• NOCs and INOCs get priority
• But NOCs provide more certainty for complex projects, and are aligned with host governments (as opposed to service companies)
• Not all governments want neo-colonialism
• The problem of reserves stalls progress.
  • Oil companies are partly valued in the stock market by booked reserves
  • In order to book reserves there must be “ownership”
• Gap between supply and demand increases relentlessly between 2005 and 2050. The world is expected to consume over 693 bn bbls of oil and over 2,500 tcf of natural gas from 2005-2025. By 2050, oil is very expensive and limited to transportation.
• On the demand side, OECD is still falling but non-OECD is still growing
• World produces 30+ bn bbls pa, replaces < 10 bn bbls
• World’s reserves dominated by large fields
• Signs of decline in largest fields
• Alternatives can’t offset decline rate
• Nationalism reduces access for IOCs, reduces efficiency
• Demand is still increasing
• Price of oil is going up

Q&A

• Natural gas and oil have different uses, so gas is a very limited substitute for oil. Not enough overlap. Thermal equivalents of oil and gas reserves are about the same!
• But peak gas is actually about 5-10 years after peak oil.
• Is it possible that the Club of Rome predictions could be true, but late?
• Ingenuity will not solve this problem.