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Page added on February 19, 2014
Peak Oil is Real and the Majors Face Challenging Times
The idea that global oil production was nearing its peak, only to plateau and then decline was a common view in the energy world for many years. The geophysicist M. King Hubbard predicted in the 1950’s that US oil production would peak in the 1970’s, a forecast that held true until technology allowed companies to economically extract oil and gas from tight geologic formations like shale.
The recent surge in US liquids output – crude plus natural gas liquids (NGLs) – quieted the peak oil community. A well-known, largely peak oil-focused website – The Oil Drum – shut down in 2013, an event some considered the death knell of the peak oil theory.
But not so fast says Steven Kopits from energy business analysis firm Douglas-Westwood. Total global oil supply growth since 2005 – 5.8 million barrels per day – came from unconventional sources, shale oil and NGLs in particular, Kopits recently told the audience at Columbia University’s Center on Global Energy Policy.
“Not only US, but global, oil supply growth is entirely leveraged to unconventionals right now,” and the legacy, conventional system still peaked in 2005, he said. This gets a bit technical, as shale oil and liquids produced with natural gas are fed into the main crude oil stream and priced as such. But the strong degree to which increasing oil supply growth is dependent on unconventional sources is important to remember and often gets lost in the exuberance over top-line output figures.
And despite prolific incremental oil and gas production made possible by hydraulic fracturing and horizontal drilling advances, maintaining legacy production has been expensive and arguably of limited success.
Total upstream spend since 2005 has been $4 trillion, of which $350 billion was spent on US and Canadian unconventional oil and gas, with an additional $150 billion spent on LNG and GTL, according to Kopits’ presentation. About $2.5 trillion was spent on legacy crude oil production, which still accounts for about 93% of today’s total liquids supply. And despite that hefty investment, legacy oil production has declined by 1 mmb/d since 2005, said Kopits.
By comparison, between 1998 and 2005 the industry spent $1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. The industry “vaporized the GDP of Italy,” with its $2.5 trillion upstream spending for oil since 2005, which barely maintained the legacy oil production system. Kopits argues this level of investment by the major oil companies appears unsustainable, and the major’s current cost structure is troublesome.
Collective oil production of the world’s largest listed oil companies has faltered, while upstream capex soared, Kopits said. Profits have suffered because costs are rising faster than revenues in a range-bound crude oil price environment. “E&P capex per barrel has been rising at 11% per year,” he said, but Brent oil prices have largely been flat. As a result, Chevron, ExxonMobil, Statoil and BP all recently put major projects on hold or cancelled them outright.
“If your costs are rising faster than your revenues, do you sell your assets? The majors have been doing this, but is it sustainable?” asked Kopits. The industry was able to maintain conventional crude oil production levels by throwing $2 trillion dollars at the system – essentially “putting it on steroids” – but now that’s run its course and capex is being curtailed, a trend that looks set to continue, in his view.
9 Comments on "Peak Oil is Real and the Majors Face Challenging Times"
Davy, Hermann, MO on Wed, 19th Feb 2014 8:36 pm
The Oil Drum – shut down in 2013, an event some considered the death knell of the peak oil theory.
It was a Peak Oil Black “OP” disguised as a “death knell”
And this is how that super-secret operation was finally made public:
“If your costs are rising faster than your revenues, do you sell your assets? The majors have been doing this, but is it sustainable?” asked Kopits. The industry was able to maintain conventional crude oil production levels by throwing $2 trillion dollars at the system – essentially “putting it on steroids” – but now that’s run its course and capex is being curtailed, a trend that looks set to continue, in his view.
Northwest Resident on Wed, 19th Feb 2014 8:52 pm
“Not only US, but global, oil supply growth is entirely leveraged to unconventionals right now…”.
As long as BAU continues, there will be constant steady pressure to find and extract more unconventionals. BAU cannot grow without constantly increased energy inputs. BAU must grow, or it will die. And die it will, sooner or later. The only question is, how soon. And will it die of its own accord due to lack of increased energy input, or due perhaps to the unbearable expense associated with “growing on unconventionals”, or will somebody somewhere say enough is enough and just pull the plug? These and other questions will be answered soon enough. Stay tuned for further developments.
rockman on Wed, 19th Feb 2014 8:53 pm
Shares of Devon Energy were among the largest energy gainers in the S&P 500 Index on Wednesday, following the independent oil and gas firm’s announcement that it is buying GeoSouthern Energy’s assets in Texas’s Eagle Ford shale formation.
And how did they help pay for this acquisition: Canadian Natural Resources Ltd., the nation’s biggest producer of heavy oil, agreed to buy Devon Energy Corp.’s conventional oil and natural-gas fields in Canada for $3.13 billion in cash.
In essence they are moving away from NG resources towards hopeful oil resources. Devon went whole hog after the east Texas shale gas play and it almost put them out of business when NG prices collapsed. A couple of years ago they went big after the Marine Tuscaloosa Shale gas play in La. and I’m told took a nasty hit.
So now that NG prices are improving a tad and some folks are anticipating a softening in oil prices Devon is going in a counter direction. We’ll have to wait to see if they get it right this time.
ghung on Wed, 19th Feb 2014 9:28 pm
Yeah, Rock, I saw that NG closed over $6 today. I wonder if the folks at Devon are rethinking their strategy (stragedy?), again. So at what price do you unplug those sleeper wells you’ve been sitting on?
rockman on Wed, 19th Feb 2014 9:37 pm
ghung – I doubt they have any sleepers to unplug. I suspect they were producing what wells they did have as fast as they could for the sake of cash flow. And the leases they owned but didn’t drill? Leases automatically expire if not drilled by a certain point in time. I suspect most if not all of those undrilled leases have expired.
J-Gav on Wed, 19th Feb 2014 10:37 pm
Rockman – Oh yeah. While prices have been languishing it’s a sure bet they weren’t gonna leave much unplugged. We’ll see going forward but unless there’s a BIG upward movement, I doubt that situation will change much since a lot of companies are going to be trying to recoup their losses …
MrEnergyCzar on Thu, 20th Feb 2014 2:18 am
There’s plenty of oil on Titan. Expect to hear that in the press in the future as the trend continues…
Stilgar Wilcox on Thu, 20th Feb 2014 8:13 am
“E&P capex per barrel has been rising at 11% per year,” he said, but Brent oil prices have largely been flat.
This is an interesting situation in which many have said oil prices will have to rise to meet increasing extraction costs, however Brent prices have been flat.
But as we know increasing extraction costs do not determine price, instead supply & demand does. Unfortunately that means greater use of non-conventional sources to make up for declining crude sources. The net effect is continued decline of EROEI, with it’s negative economic knock-on effects.
Just can’t get away from declining EROEI. But that would mean the laws of thermodynamics are in full effect for a finite FF endowment from past periods of Earth’s history we have been burning in ever greater amounts, insisting on growth to substantiate the capability to pay loans, build skyscrapers, high speed rail, infrastructure, ever greater levels of complexity…crash!
St. Roy on Thu, 20th Feb 2014 9:25 am
Right on Stilgar