[FatherOfTwo]

http://www.oxfordenergy.org/presentatio ... letion.pdf

A couple of arguments are often posted here on peakoil.com as reasons as to why peak oil is imminent. One is that private oil companies haven’t been investing in finding new oil because there is “little new oil to find.”

Another is that depletion rates in the range of 7-8% (thinking of the recent article on Oil Drum) will be indicative of the depletion rates going forward.

The following article posts some good counter arguments to those claims. It provides some interesting tidbits on why oil companies have acted the way they have. More generally the author also tackles the issue of whether or not we are near a crisis of “peak oil”. On this last point I think the author doesn’t make a very strong case especially considering his tacit admission that the industry may be under-equipped and under-manned to respond to demand. But nonetheless he makes some good points that require consideration.

Four main points are argued in his article:

Lack of new exploration has been due to oil companies’ concentration on harvesting known assets. Until very recently there has always been ample spare capacity in the world. This has led private companies to pursue the Holy Grail of Return on Capital Employed targets – getting cash out of known assets and not spending cash on finding more fields which would sit idle.

Mature field decline rates are a concern but are a result of a combination of several factors and do not indicate overall worldwide resource stress nor do they act as an indicator of future decline rates. Most fields that are experiencing high decline rates are resources that have been exploited without restriction. (ie. Little government intervention) Those non-private fields (such as in Mexico) that have experienced high decline rates are due to the severe siphoning off of cash flow thus diverting resources necessary to sustain production.

New legacy assets take time to come online and until recently were not pursued due to internal criteria which resulted only in the most profitable (real rates of return in excess of 7 to 8 percent) projects being pursued.

Manpower (and other logistical) constraints will be the biggest barrier to rapidly building up production capacity.

An interesting read..

[Geology_Guy]

If you read the article he says that depletion is not a problem, but then he ends with don't worry because depletion might be a problem but we have GTL and biofuels!

[smiley]

$this->bbcode_second_pass_quote('', 'L')ack of new exploration has been due to oil companies’ concentration on harvesting known assets. Until very recently there has always been ample spare capacity in the world. This has led private companies to pursue the Holy Grail of Return on Capital Employed targets – getting cash out of known assets and not spending cash on finding more fields which would sit idle.

[FatherOfTwo]

$this->bbcode_second_pass_quote('smiley', '')$this->bbcode_second_pass_quote('', 'L')ack of new exploration has been due to oil companies’ concentration on harvesting known assets. Until very recently there has always been ample spare capacity in the world. This has led private companies to pursue the Holy Grail of Return on Capital Employed targets – getting cash out of known assets and not spending cash on finding more fields which would sit idle.

[Antimatter]

$this->bbcode_second_pass_quote('OIES', 'T')he world average decline rates might be in the order of 3 to 4 per cent but the private oil
companies average decline rates are in the order of 7 to 9 per cent.
To put this in context, of all the production that the private oil companies are forecast to
bring on stream, nearly 70 per cent of this will be required to offset the impact of decline
leaving just 30 per for growth.

[bobcousins]

I thought that was a very weak presentation. Plenty of opinion but few numbers.

It begs the question, why did the majors switch from exploration to exploiting existing reserves? Perhaps because they were all finding exploration expensive.

Arnott pretty much follows the economic line, "it just needs investment". Great, now where is this oil coming from? We know we have been in a net decline for a decade. We also know the prospects are in expensive or restricted areas. Arnotts answer is "somewhere but I don't know where". That is not good enough.

[FatherOfTwo]

$this->bbcode_second_pass_quote('bobcousins', 'I') thought that was a very weak presentation. Plenty of opinion but few numbers.

It begs the question, why did the majors switch from exploration to exploiting existing reserves? Perhaps because they were all finding exploration expensive.

[Ibon]

$this->bbcode_second_pass_quote('FatherOfTwo', '')$this->bbcode_second_pass_quote('bobcousins', 'I') thought that was a very weak presentation. Plenty of opinion but few numbers.

It begs the question, why did the majors switch from exploration to exploiting existing reserves? Perhaps because they were all finding exploration expensive.

[donshan]

After reading the following quote from the Oxford Energy report in the link above I remembered a recent Dow News Wire report about Devon Energy in just put in my file.

Quote from Oxford Energy:

$this->bbcode_second_pass_quote('', 'T')o my mind though the most important issue that we need to consider is how new oil can be brought to the market.

In this respect I believe the private and national oil companies are responding to the lack of spare capacity.

The private oil companies are increasing exploration expenditure and increasing capital expenditure in new legacy assets.

[GreyZone]

FatherOfTwo, let me tell you one reason why that article does not make sense even financially. Oil companies are valued partly based on reserves. If, year over year, reserves decline relative to production, the value (and hence the stock value) of the company goes down. That valuation is a major factor in how a bank determines how much it is willing to loan to an oil company. Thus, there is and always has been pressure on to keep reserves high and growing. To argue that these companies can ignore this economic pressure for decades at a time is specious logic on the part of the original author.

So no, I do not find that argument to be compelling at all.

[rockdoc123]

I don't think what anyone has said here is at odds with each others view. All of the points made come into play when oil companies decide on where their money goes. One thing that was missed, however, is that on top of the concern of wanting to maximize your return there is a need to please your shareholder. As a consequence over the past 5 years or so there has been considerable pressure on companies to buy-back their own shares....this being seen by the shareholders as a better investment for them (and they are who the oil companies live for when it is all said and done)...this at the expensive of doing risky investment in exploration. As well up until this past years increase in prices there has been a greater emphasis on replacing reserves/production by buying it....this being costlier but less risky than exploration.
Another issue you need to consider is that of making sure production targets are met....hopefully ever increasing, is a major driving force for companies. For a company that currently produces several thousand of barrels a day, purchasing production in North America or exploring in North America makes a lot of sense, the fall out of course is they add little in the way of overall reserves. For companies that produce hundreds of thousands of barrels a day small production additions are pretty meaningless...they either need to buy companies outright or participate in projects that can have a large impact on their production numbers....hence heavy oil and megaprojects like LNG in Qatar. This need to find reserves capable of having large impact on production drove the big companies into the deep water and then the ultra deep water.
But having spent many years looking at exploration and development opportunities around the world I have to say we are getting to the point where their are very few areas that have been overlooked. So it is not as simple as just doing more exploration.....the exploration game has become increasingly risky as we are forced to drill for less conventional plays or in areas where we previously felt there was little hope of finding hydrocarbons. It ain't all over yet, but the fat lady is warming up.

[FatherOfTwo]

$this->bbcode_second_pass_quote('GreyZone', 'F')atherOfTwo, let me tell you one reason why that article does not make sense even financially. Oil companies are valued partly based on reserves. If, year over year, reserves decline relative to production, the value (and hence the stock value) of the company goes down. That valuation is a major factor in how a bank determines how much it is willing to loan to an oil company. Thus, there is and always has been pressure on to keep reserves high and growing. To argue that these companies can ignore this economic pressure for decades at a time is specious logic on the part of the original author.

So no, I do not find that argument to be compelling at all.

[GreyZone]

You appear to be arguing that two billion dollar oil companies, one with just one barrel of reserves, should be valued identically to a similar company with a billion barrels of reserves if the RoACE is identical.

If you are not arguing this, and admit that reserves play a crucial part (emphasis on part) of an oil company's valuation, then you just agreed with me.

[FatherOfTwo]

$this->bbcode_second_pass_quote('GreyZone', 'Y')ou appear to be arguing that two billion dollar oil companies, one with just one barrel of reserves, should be valued identically to a similar company with a billion barrels of reserves if the RoACE is identical.

If you are not arguing this, and admit that reserves play a crucial part (emphasis on part) of an oil company's valuation, then you just agreed with me.