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Page added on May 17, 2015
Shell’s Arctic voyage marks beginning of peak oil era
In his critically acclaimed 2005 book ‘Twilight in the Desert’, the prominent oil economist Matthew R. Simmons predicted that Saudi Arabia’s oil wells would soon run dry.
His argument was based on the age of the seven main fields, which the kingdom still to this day depends upon to pump the bulk of its 10m barrels per day (bpd) of crude. These fields in the main have been producing for over a generation and, despite official figures placing Saudi Arabia’s proven reserves at over 260bn barrels, Mr Simmons argued that the kingdom would struggle to increase its output to keep pace with the projected increases in the demand over the next half century marking the beginning of a period known as “peak oil”.
The kingdom, which enjoys some of the lowest production costs in the world, has the capacity to pump 12m bpd if required and shows no signs of slowing down. However, the big question remains whether the Middle East’s energy superpower along with the world’s other major oil producers will be able to keep up with the expected increases in demand over the next 25 years?
By 2040, the Organisation of the Petroleum Exporting Countries (Opec) predicts the world will need to produce 111m bpd of crude to meet world demand. That represents another 20m bpd on top of existing output which means the world needs to find and develop and additional 800,000 bpd of oil a year on average to keep up with supply. To put that challenge into perspective, this figure represents repeating the US shale oil boom all over again, or finding a developing a new North Sea 20 times over.
Although, Mr Simmons was perhaps wrong in focusing on a potential collapse in Saudi Arabia’s oil production he was right in warning about the dangers of “Peak Oil” but too early in predicting its onset. That time is now upon us. Despite, oil prices being forced lower over the last six months the world is entering into a “peak oil” scenario whereby the cost of a barrel could feasibly quadruple to around $200 per barrel over the next 10 years.
World will need to repeat US shale revolution to meet future oil demand
Even though the current weakness in oil prices below $100 per barrel has been caused by a glut in global supply this will be short lived. Most of the new oil has come from three sources, US shale, Iraq and Africa. Each has its own problems going forward that will limit its potential to deliver the incremental increases in supply that will be required to meet even the most pessimistic forecasts for demand by 2040.
In the case of US shale this oil already represents the bottom of the barrel. Lower prices mean that US output will plateau this year at around 9.3m bpd as oil companies shut down rigs at a record rate. However, even when these rigs eventually return once prices recover, as they have since March, it is unlikely that America’s oil output will ever repeat the staggering growth seen over the last decade. The country’s shale oil wells will be fracked to oblivion long before demand peaks in 2040 creating a potential energy shock in the world’s largest economy.
Then there is Iraq, which is now exporting crude at a record level. The war-torn country is now Opec’s second-largest producer pumping around 3.3m bpd of crude but with big ambitions to potentially double this over the next five years. This is sadly a pipe dream. Boosting Iraq’s production long term would require billions of dollars of investment and a stable secure government. However, the former cannot exist without the latter especially with the Islamic State (Isis) now controlling Anbar province, one of the country’s biggest regions.
The fact that so much of the incremental increase in net production from the Middle East is forecast to come from Iraq shows the precarious state of the world’s oil supply. Can any oil economist who is currently predicting that low oil prices will last really say with confidence that the government in Baghdad will be able to drive Isis out of the country, or even survive?
Isis onslaught shows World cannot depend on Iraq for oil
After Iraq the next great hope for increasing oil production in the Middle East is Iran. Tehran believes that it can boost oil production to 5m bpd if sanctions are fully lifted. Although a framework agreement with the West over its nuclear programme is in place this is a long way short of a binding deal. Boosting Iranian oil production could take years and would require the investment of international oil majors. It’s still unclear whether Iran is willing to offer the right terms to attract this investment, or indeed whether oil companies are willing to take the risk while the Shiite Mullahs still hold the balance of power in Tehran.
Finally there is Africa, Russia and Latin America. All three regions hold vast oil resources but lack either the political stability or credible leadership. In Russia, the recent actions of President Vladimir Putin have called into question whether it can be relied upon as a mainstay of global energy supply. In Africa, major producers such as Nigeria are hamstrung by corruption, while Libya barely exists as a country. Latin American states such as Brazil hold potential but they won’t be enough to head off “Peak Oil”.
In the UK, the North Sea is in terminal decline and will cease to be productive in 25 years when we need the oil most. Although, the UK has shale oil in places such as the Weald Basin even based on this most optimistic forecasts this won’t be enough.
This brings us to Royal Dutch Shell and its persistence in gaining a foothold in the Arctic despite the environmental challenges this presents. The Anglo-Dutch company, which is the most cautious of the major international oil companies, is prepared to soak up the bad publicity of hundreds of activists taking to the water in Seattle to confront the arrival of its Arctic drilling rigs over the weekend. It knows that the Chukchi Sea is one of the last remaining regions that contain world-scale oil reserves that can be reached without taking a major geo-political risk.
More companies will follow Shell into the Arctic and it is absolutely vital to the global economy that they do. Shell believes it can eventually produce around 400,000 bpd from the region, which is about half of what the world needs to find and develop ever year for the next 25 years to avoid running out of oil. Therefore, Shell’s Arctic rigs literally represent the real beginning of the era of “peak oil” that Mr Simmons originally predicted which will eventually lead to the $200 barrel
26 Comments on "Shell’s Arctic voyage marks beginning of peak oil era"
BobInget on Sun, 17th May 2015 6:10 pm
“Although, Mr Simmons was perhaps wrong in focusing on a potential collapse in Saudi Arabia’s oil production he was right in warning about the dangers of “Peak Oil” but too early in predicting its onset. That time is now upon us. Despite, oil prices being forced lower over the last six months the world is entering into a “peak oil” scenario whereby the cost of a barrel could feasibly quadruple to around $200 per barrel over the next 10 years.”
“More companies will follow Shell into the Arctic and it is absolutely vital to the global economy that they do. Shell believes it can eventually produce around 400,000 bpd from the region, which is about half of what the world needs to find and develop ever year for the next 25 years to avoid running out of oil. Therefore, Shell’s Arctic rigs literally represent the real beginning of the era of “peak oil” that Mr Simmons originally predicted which will eventually lead to the $200 barrel”
Mike989 on Sun, 17th May 2015 6:42 pm
The Arctic represents literally the Most Expensive Oil On Earth, with the highest labor costs, and the most risk of catastrophic failure.
The expense is so great, it points out the stupidity of Oil Management. You’d rather assign assets into the high risk, high expense Arctic vs. building Solar Fields in the 10 sunniest states in the USA???
You must be INSANE.
And what about Mexico.
From California to Florida, either You Build solar energy for 5 cent per kWh or SOMEONE ELSE WILL. And they will Put You Out Of Business.
But, you stupid Repubs, Keep doing stupid things as we watch Economic DARWINISM Destroy You.
Davy on Sun, 17th May 2015 6:45 pm
Mikey is back with the AltE fantasy. Mikey how can you compare oil to solar? Is solar going to run or transportation fleet?
JuanP on Sun, 17th May 2015 6:46 pm
I really wonder what will happen in the Arctic. I think this Shell enterprise will end up being a huge money pit. At what price would they need to sell that oil to get a decent ROI?
But, as we have seen with the shale oil bubble, oil doesn’t need to be economical to get extracted. As I understand it, most of the shale oil has been produced at an economic loss, but financial speculation and government intervention made it possible anyway, at least for a while. Will the same happen with Arctic oil? While I doubt it, it is possible.
Davy on Sun, 17th May 2015 6:47 pm
Bob, do you really think the economy will ever be able to afford $200 oil? It has never paid $200 for oil before.
rockman on Sun, 17th May 2015 9:37 pm
“…Shell’s Arctic rigs literally represent the real beginning of the era of “peak oil”…”. An utterly ridiculous statement IMHO. So many other “PO red flags” have popped up over the years. All the way from the recent surge in US oil production and going all the way back to 4,500+ rigs drilling in the US in 1980.
And they also seem oblivious to previous activities in the Arctic in 2014:
Russia’s Rosneft has made a major oil and gas discovery in the Arctic Kara Sea following the drilling of the northernmost well in the world in the East-Prinovozemelsky 1 block. According to preliminary results, the resource base of the first hydrocarbons trap discovered through the drilling is estimated to hold 338 over 730 million barrels of crude.
dave thompson on Sun, 17th May 2015 9:46 pm
I find it doubtful that oil in the arctic is going to make a lot of difference. Difficult,expensive oil is all that is left all over the planet and the arctic is most likely the worst to bring up to scale to make any difference.
James A Hellams on Sun, 17th May 2015 10:16 pm
Davy
You ask a very good question about solar running our transportation fleet.
If you are looking at highway and aviation based transportation systems, it will not be possible to develop solar powered cars, trucks, and airliners on a basis that will be commercially possible. However, when you consider railroads; it is a different story.
With the railroads, you can electrify every inch of rail that we have. This will make it entirely possible to run a train from coast to coast nonstop without burning one drop of oil for energy.
With electric power being generated from every energy source known (including solar); you have a method of transportation that is commercially viable.
Also, the trains are the most energy efficient means of transportation that we will ever have! This will make it possible to ship passengers and cargo across the country using the least amount of electric power per passenger and cargo to do so.
apneaman on Sun, 17th May 2015 10:42 pm
James, we could probably put a few people on mars, but that ain’t gonna happen either. The people running the world have other plans. There is the way things should be and the way things are.
antaris on Sun, 17th May 2015 10:55 pm
And who will protect this valuable train. Back to the Wild West.
shortonoil on Mon, 18th May 2015 8:33 am
“Bob, do you really think the economy will ever be able to afford $200 oil? It has never paid $200 for oil before.”
We use a very simple metric to demonstrate affordability. It is the Price to Value ration. Price is the price of oil over any specific year, and value is the amount of economic activity a barrel of oil can generate. A barrel of oil has an energy content 5.88 million BTU, so its value to the economy in 2014 was $1,002/ barrel. Over the last 40 years the P/V ratio has averaged 6%. In 2013 it hit 12%, and the price collapsed. $200 oil at present would give a P/V ratio of 20%.
The two times in history that the P/V ratio hit 12% the price collapsed; 2008, and 2013. This relates to the Consumer Affordability:
http://www.thehillsgroup.org/depletion2_022.htm
Consumer Affordability is the point where a barrel of oil can no longer drive enough economic activity to allow the consumer to pay for it. The energy in a barrel of oil is fixed, so it is merely a matter of how many BTU a $ can buy. We get that from World Bank, and EIA data:
http://www.thehillsgroup.org/depletion2_008.htm
In 2015 that will average 5,631 BTU/$. Petroleum is not a magical substance; if the consumer can not afford to pay for it, it is not going to be used. $200 is way more than the consumer can afford to pay. To know what the Maximum Consumer affordability is it must be calculated. Getting something that you wished for, only works in Fairy Tales.
http://www.thehillsgroup.org
rockman on Mon, 18th May 2015 8:56 am
shorty – Does your data allow you to capture the P/V ration back in the early 80’s when prices collapsed after the 300% increase in the late 70’s?
Mike989 on Mon, 18th May 2015 12:56 pm
Yes, actually I do expect the transportation fleet to go PURE Electric with Battery Power. That’s how fast the battery world is changing. They are working, now, on electric big rigs.
The first ones out the box will have only 100 mile range, that’s this year. But that will improve rapidly.
Expensive Oil is at a DEAD END.
The fact that you Repubs are totally in the dark doesn’t surprise me. You watch Pay-for-Coverage-Fox-News. The startup’s don’t pay for coverage. The companies with Monopoly positions Pay for positions that protect their monopoly.
Just like Global Warming. You all look like idiots denying global warming, as Another Al Gore “prediction” comes true, as the Antarctic ice sheet breaks off early. Another 100 year prediction that happened in less then 10.
Let’s face it, the more right wing, the more of a business incompetent you are. It’s actually a good SHORT Position to Play. If the CEO continues to spout right wing bull, you can profitably Short his company for GOLD.
shortonoil on Mon, 18th May 2015 1:00 pm
“Does your data allow you to capture the P/V ration back in the early 80’s when prices collapsed after the 300% increase in the late 70’s?”
Year…P/V%
1975…6.0
1976…6.0
1977…5.0
1978…5.0
1979…6.0
1980…6.0
1981…6.0
1982…6.0
1983…7.0
1984…9.0
1985…7.0
1986…6.0
1987…5.0
1988…4.0
1989…4.0
1990…6.0
Mike989 on Mon, 18th May 2015 1:00 pm
I’ll put it to you this way.
Exxon is expecting Linear growth in solar.
Did the iPhone have a Linear growth curve, go ask Nokia.
You’ve been WARNED.
Mike989 on Mon, 18th May 2015 1:41 pm
Here’s a business rule you should remember.
If you land is going to flood in 50 years, and be worthless, then it’s worthless today.
Worthless for 90% of development, it has a strong negative current valuation, where you can just round down to Zero.
That’s where oil is at now.
That’s why people are divesting now with such vigor.
And the media that attempts to protect monopoly positions is giving you bad economic advice.
Mike989 on Mon, 18th May 2015 1:42 pm
Dumb investors take losses.
Smart investors Invest in Reality.
shortonoil on Mon, 18th May 2015 1:42 pm
It is interesting to note that oil has had about the same leverage as the S&P 500. That may be just coincidence, but it won’t be surprising to discover that oil, which powers the world’s transportation machinery, also influences its financial markets more than we generally give it credit for doing. We’ll have to give that possibility some serious consideration at some point. It falls outside the scope of the study, but it could be an interesting topic for a news letter.
rockman on Mon, 18th May 2015 1:55 pm
“The fact that you Repubs are totally in the dark doesn’t surprise me”.
You do understand that more than half the fossil fuels in the US are consumed by folks who are not members of the Republican party, don’t you? LOL.
rockman on Mon, 18th May 2015 2:00 pm
Thanks shorty. As I just postulated in another post regarding the US becoming “free” of imported oil consider how high oil prices would have been since 1970 if we had not had the opportunity to import the 106 BILLION BLS OF OIL that we did consume. And how would that have changed your P/V history and how much worse would the ratio have been over the last 45 years.
Davy on Mon, 18th May 2015 2:10 pm
Mike, the fantasy man thinks we are going to go 100% EV with our transport fleet. What a feeling Mikey. I ask you how we are going switch out 1BIL vehicles at the same time we are running them? Where are all the natural resources coming from? Where will all the capital come from? Get a grip Mike you look corny.
Dredd on Mon, 18th May 2015 2:11 pm
More like peak sanity (The Peak of Sanity – 3).
apneaman on Mon, 18th May 2015 4:24 pm
Fossil fuels subsidised by $10m a minute, says IMF
‘Shocking’ revelation finds $5.3tn subsidy estimate for 2015 is greater than the total health spending of all the world’s governments
http://www.theguardian.com/environment/2015/may/18/fossil-fuel-companies-getting-10m-a-minute-in-subsidies-says-imf
shortonoil on Mon, 18th May 2015 5:40 pm
“since 1970 if we had not had the opportunity to import the 106 BILLION BLS OF OIL that we did consume.
Without that 106 Gb we would have been in one god awful of a depression for the last 30 years. I just threw a nice ham steak in for diner, without that oil it would probably be something more like ALPO (if I had been lucky).
Davy on Mon, 18th May 2015 6:05 pm
If in 1862 we chose not to pursue oil as our foundational commodity we might have a future now. Oil and the car culture will be our end.
dougT on Wed, 20th May 2015 10:08 am
oh, the irony – protesting hydrocarbon development in plastic boats!