Runoff Calculations Predicting Runoff Depth, Volume and Peak Flow
Predicting A World Oil Production Peak/ Possible Price Trajectories
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Predicting A World Oil Production Peak/
Possible Price Trajectories
Presented at theCalifornia Energy Commission
Workshop on World Oil Supplies April 28, 2003
Sacramento, CAAlfred J. Cavallo, Consultant
289 Western WayPrinceton, NJ 08540
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OUTLINEBackground• Increasing Demand, • Finite Supplies
The Debate: When will oil production peak?(What Debate?)
New Approach: New Model/ Model ValidationResultsPossible Price TrajectoriesConclusions
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BACKGROUNDIncreasing demand driven by:· Population increase· Industrialization of China, India
Projected world annual demand increase: 2%/year
Exponential growth: 2%/year over 20 years: x 1.5 increase.
75 Mbbl/d (2002) => 110 Mbbl/d (2022)
History: 1.5% increase over last decade
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THE DEBATEConventional petroleum reserves are finite.Production has peaked in the US, UK, Egypt or isflat in many non-OPEC oil plays
When will world oil production peak?What are the reserves?Where are the reserves?What are the alternatives?
Except there is no debate.Why?????
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WHAT OIL PEAK?Public interest groups:Greenhouse effect will limit consumption, not
resource constraints.(The stone age didn't stop because people ran out
of stones.)EIA (Annual Energy Outlook 2003):Business As Usual Through 2025 (Peak in 2037?)
EC (2001): No problem through 2025
CIA (2002): Peak in 2025 (Not widely reported)
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REASONS FOR NON-ISSUECry wolf too often.· PA geologist in 1874 stated that the US would
run out of oil by 1878.· Club of Rome (1972)· USGS (1981)· Campbell (Scientific American, 3/98); oil price
drop to $10/bbl in 12/98.
Reasons for difficulty with predictions:Market price decoupled from production cost: =>
wild price fluctuations.[Market price not now a reflection of fundamental
resource limits.]
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ContinuedReserve estimates problematic (until recently:
back of envelope calculations).
No error bars on reserve estimates.
Proprietary reserve estimates
Poor ModelsNo analysis of assumptions or limitationsHubbert's Peak: No geophysical or physical reason
for production to follow a logistic growth curve.
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QUESTIONCan a forecast be made that is useful to consumers
and producers, one that will alert them to problems so that alternatives might be put in place?
[Useful vs useless predictions]
Requirements:
· Believable Reserve Estimates· Transparent (econometric) Model
Understand Market Rules
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UNDERSTAND THE RESERVESSupplies are now abundant due to profound
advances in geosciences and in petroleum engineering and technology:
1. Plate tectonics2. Oil formation (source rock), migration,
trapping2a. All major sedimentary basins explored, more
remote, or deeper deposits developed.3. Three dimensional seismic surveys4. Lateral drilling5. FPSOCorollary: Much better reserve estimates can be
made (not widely appreciated).
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UNDERSTAND THE MARKETS
How profitable is this business?What are production costs?· Now· Future
"Non-OPEC finding and development costs dropped from $22/bbl in 1981 to $6/bbl in 2001 (2001$)."
E. Baird, President and CEO, Schlumberger Ltd.Fossil Fuels, The Key to Sustainable Development, World Energy, 2003, Vol 6, No. 1, p 34-41.
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Marginal Lifting Cost, Existing Fields
05
1015
1998 Dollars/Barrel
Mill
ions
of
Barr
els/
Day
Non-OPEC
OPEC
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Expolration, Development and Operating Cost, New Fields
0
500
1000
>20 15-20 10-15 5-10 0-5
1998 Dollars/Barrel
Billi
ons
of
Barr
els OPEC
Non-OPEC
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PROFITSWhat is the market price??
OPEC "price band" of $28-$22/bbl
CONCLUSION:Market Price decoupled from production cost (OPEC,
non-OPEC)Market equilibrium does not exist.
Delectable Margins!!!! (OPEC and non-OPEC Producers)
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US Wellhead Price (1996$) 1919-2000
0102030405060
1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
Year
Dol
lars
/Bar
rel
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CONSEQUENCES
· Market Price gives no indication of how rapidly reserves are being depleted.
· Market rules favor maximum rates of current production (OPEC and non-OPEC).
· More expensive non-OPEC reserves are being depleted much faster than low cost OPEC reserves.
· Prices may decrease as production approaches a peak.
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THE MODELModel Assumptions: · Market Stability: OPEC rules (swing producers)· Decision Criterion: Production Plateau or Peak when
USGS Proven plus Undiscovered Reserves to Production Ratio (Rp+u/P) drops to between 10 years and 20 years.(Economics: Nobody will increase production after this point since the future of the enterprise is threatened.)
· Aggregate/disaggregate reserves/producers· Assume all undiscovered oil is discovered and marketed
as rapidly as needed· Assume 2% demand growth (1%, 3%).
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HORSEFEATHERS!
Predictions always wrong before …. (so they always will be wrong..) The USGS is a bunch of armchair geologists...
Trust the good ol’e boys to find all the oil you need...
Model ValidationNow have many more years of experience, many more non-
OPEC oil plays are well-developed and have plateaued or peaked production.
Using available production statistics (Petroleum Economist, World Oil), examine production trends relative to USGS Rp+u.
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0102030405060708090
100
UK
*
Nor
way
*
Egyp
t
Gab
on
Arg
entia
Syria
USA
*
Ecua
dor
Yem
en
Indi
a
Mal
aysi
a
Om
an
Chi
na
Aus
tralia
Den
mar
k
Ang
ola
Bra
zil
Rp+
u/P
(200
1) y
ears
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Non-OPEC Reserves vs Time
01020304050
1995 2000 2005 2010 2015 2020
Year
Rp+
u/P
(yea
rs) 2% Growth
1% Growth
3% Growth
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World Oil Reserves vs Time
010203040506070
1995 2000 2005 2010 2015 2020 2025 2030
Year
Rp+
u/P
(yea
rs)
2% Growth
1% Growth
3% Growth
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BEST CASE SIMPLIFYING ASSUMPTIONS
1. “Aggregate Producers, Full Cooperation”Unrealistic, especially as one approaches a peak (OPEC and non-OPEC).
2.“All undiscovered oil found and produced as rapidly as needed.”Unrealistic, especially for FSU, as more remote fields are developed.
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World Recoverable Oil
0500
100015002000250030003500
Hubbe
rt (1
962)
Despr
iaire
s (19
80)
Nehrin
g (19
78)
Halbou
ty (1
979)
Bois (1
980)
Bois (1
980)
FGS Ham
burg
(198
0)
Campb
ell (1
998)
USGS (200
0)
B b
bl O
il
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POSSIBLE PRICE TRAJECTORIES
Old (OPEC domination)· Long production plateau after 2010, gradual
price rise
New (US dictated)· Price decrease ($15-20/bbl), rapid increase in
consumption· Market collapse and desperate search for
alternatives (GTL, heavy oil, tar sands).
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ADVANTAGES OF NEW SYSTEM TO THE US:
· Buy support (cheap gas) for war(s) from US voters
· Remove resources from those likely to challenge US domination.
· Full control of oil allows US to dictate the rules for the world economy
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ALTERNATIVE POLICY
SURCHARGES AND REBATES
SURCHARGE: Phase in a $3/gallon (minimum) surcharge on gasoline
REBATE: Surcharges immediately recycled to consumers to help them cope with new world.
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CONCLUSIONS
· Science (Reserve Estimates) plus Understanding of Market Rules allow credible predictions to be made
· Production peak in near future (2010-2020)· Sooner under US, later under OPEC· Cheap gas until the peak is clearly visible· US-dictated production rates will lead to a
much more chaotic transition to a sustainable economy.
* Alternatives are technically feasible and affordable