Peak Oil

FROM The Oil Crunch

A wake-up call for the UK economy

The first possibility is that we are already producing at, or near, the maximum capacity of our existing fields and no more significant oil fields can be found, despite increasingly intense exploration activity. This is the conventional understanding of the case for ‘peak oil’. Despite the facts that there is a large amount of known oil in the ground (more than we have extracted to date), and that new finds are constantly being reported, none of this adds up to enough to replenish the current levels of draw-down. The new, easily accessible, supergiant fields which are necessary to replenish the mainstay of current production are nowhere to be seen. The need to find new super-giant fields is illustrated by the fact that, although there are some 70,000 known fields in current production world-wide, the vast majority of these produce oil in insignificant volumes.

The world is heavily dependent on 120 oil fields that collectively account for 50 percent of world production and contain two thirds of the remaining reserves of fields in production. Their average age is 42 years and although the expectation is that their production will slowly decline in a predictable manner this is not always the case. The Cantarell field offshore Mexico was one of the world’s largest fields when it was discovered in 1975. Following the start of production in 1980, field production rose steadily and by 2000 it was producing over 1Mb/d. Nitrogen injection was used to enhance oil recovery from 2000 and in 2005 production peaked at 2.2Mb/d. At this point Cantarell was the second most productive oil field on earth only exceeded by Saudi Arabia’s Ghawar field. However, in late 2005 a sustained and rapid decline in production started and has continued ever since. By August 2009 production from Cantarell was down to 0.65Mb/d amid hopes that production may finally be stabilising. By global standards Cantarell is not an old field. Large numbers of still producing Middle East fields started up in the 1930s, 1940s and the early 1950s. The lesson to be drawn is that production from elderly oil fields may not be as reliable or as predictable as is generally supposed.

The second possibility is that we are producing oil at, or near, the maximum capacity of the existing fields, but large new (and easily accessible) finds will be brought on stream in future despite the fact that these sources are currently unidentified. The relative absence of obvious candidates for immediate exploitation merely reflects the comparatively low levels of oilindustry investment in exploration and production over the past decade (due, mainly, to the relatively low market prices for oil). Unfortunately, even if large new finds are in the offing, only limited new capacity will arrive on stream within the next decade or so, because large fields take many years to develop. In a world with rapidly rising global demand, this will inevitably lead to a sharp and sustained rise in oil prices over the coming decade, even though prices may retreat again in the longer term. In our view, this description of the present state of global oil production is credible, but unlikely.

The third possibility is that there will be new discoveries of large new oil sources, but they will not be easily accessed, or they will be difficult to extract from. The recent deep offshore, sub-salt, finds in South/ Central America, and the tar sands of Canada, are good examples. Under these circumstances, even though abundant oil reserves may be uncovered with the passing of time, the ability to extract that oil will be limited both physically and by the sheer cost of exploration and production. Consequently, there will be a sharp, and permanent, rise in oil prices from which there will be no retreat. In our view, this description of the present state of global oil production is probably the best that is available.