“Peak is dead” and the future of oil supply

Peak Oil Review Commentary:  Interview with Richard G. Miller

Dr. Richard G. Miller, trained as a geologist, joined BP as a geochemist in 1985. He studied peak oil matters since 1991, when BP asked him the following year to devise a wholly new way to estimate global oil resources.  In 2000, he was tasked with creating an in-house projection of global future oil demand and supply to 2030.  The model he created was updated annually through 2008; then the effort was disbanded and he moved on to his present work consulting on peak oil. Most recently, Dr. Miller co-authored The Future of Oil Supply, which was published by The Royal Society (on-line December 2, 2013), in a thematic issue of Philosophical Transactions entirely devoted to future world oil supply; he also served as co-editor of that 12-article publication.

Steve Andrews touched base with him last week for the Peak Oil Review.

Q: Andrews:  BP has recently said definitively that “peak oil is dead.”  How does an oil super-major reach such a conclusion, at least for purposes of public policy dialogue?

Dr. Richard Miller: I can’t shed any light on why they’re saying that today because it hasn’t been their consistent position in the past.  A CEO like Lord John Browne clearly at least kept his options open on the idea; and he was the one who started to steer the company into alternative energy.  The one who really didn’t have any sympathy with peak oil was Tony Hayward; it was really sad to see him bring the company’s investments in photovoltaics and other non-conventional energy almost to a screeching halt, deciding that the company was going to become a pure hydrocarbons company.  That did seem very short-sighted.  What’s odd of course is that he’s a geologist, and a very good geologist.  You would think that someone like that could at least see that peak oil is not only coming, it’s quite probably here, in terms of conventional oil.

Q: The third-hand story from someone at the 2001 World Economic Forum is that Daniel Yergin was on a panel with Lord Browne and convinced him, right after his presentation, to doubt peak oil. 

Miller:  Daniel Yergin is a rubbish scientist.  He’s a very good flak, he’s a very good writer, he’s very perceptive in many ways, but I’m not convinced that he has grasped the underlying science of anything.  I’ve read The Prize cover to cover; it’s a lovely history. But he seems to fall into this camp that says if you’ve got over 50 years of reserves in the ground, at current supply rates, how could there possibly be a problem?

Q:  In your paper, you mention the difficulties of accessing the relevant oil data, the unreliability of the data that are available, and the pervasive influence of powerful political and economic forces.  How good or bad are the data?

Miller: At a national level, the data is reasonable in terms of production.  There are some things that you can’t hide.  Even if you are a Saudi Arabia or Iran or Iraq and you don’t want people to know too much about your industry, you still can’t hide how many super tankers are moving out of your country.  You know how much is being exported, and you can have a good stab at how much is being consumed internally, so the national production numbers are pretty good.

Where it falls down is looking at field-by-field data because this is how you see what is going on.  That’s important, that’s how you start to learn the reality and rate of decline.  That data is frankly terrible.  There are a few western countries that are quite open.  The UK for example is entirely open.  You can go online and find all that data, month by month and field by field.  For most fields though, you have to turn to the commercial databases, and the biggest of those is IHS.  If you’re looking for full access to that, you’re talking about a price, when I last looked, of well over a million just to study their field-by-field production data.

While I was at BP I was able to look at IHS data, and it’s increasingly clear that a lot of their data is very old.  It was good when it was obtained, it was the best in the world, but some of it dates back 20 years and more.  It’s still the best data there is, there is no other comprehensive source for it.  At the same time, you know the data that goes into IHS is not really audited; there are no sources that you can cross-check for a lot of this stuff.

For example: There were an awful lot of tiny fields that appear to be included in their grand sum of reserves; you’re talking about fields from 1/10 of a million barrels to 10 million barrels in places where you can’t imagine that they would be economic to produce.  So you have to wonder if those are included in IHS’s global reserves numbers and forecasts.

The model I built for BP’s internal forecasts was a bottom-up model, one which tried to get right down to that field-by-field level.  Unfortunately, the more important the data were, the less reliable they were.  But it did at that time suggest that there was a large quantity of undeveloped resource in the ground which looked like it provided a comfortable hump of supply into the future with no real supply difficulties.  I have a colleague who refers to this as the Miller Hump.  That was basically derived from IHS data.  If memory serves, there was something on the order of 250 billion barrels which hadn’t been developed.

I still run this model, doing it year by year for many years.  The funny thing is that that hump of undeveloped oil keeps moving forward.  It never got developed.  That was what got me thinking that that oil doesn’t exist as a reserve as we would generally understand it—something that is economically and technically worth producing.  Some of those reserves are actually discoveries that are probably not recoverable.

I should add that BP had access to one or two other databases plus its own internal data base.

Q: You mentioned that between 2000 and 2007, additions to global reserves were over twice as large from reserves growth (33 gigabarrels) as from new discoveries (15 Gb).  What’s the significance of that point?

Miller: If you look at total reserve increases, they exceed global consumption and thus reserves year by year are growing.  And this is why economists like Peter Odell just point at the reserve numbers and laugh at people like me, “We’re not running out of oil, we’re running into oil.”  However, increasing the reserves in a field, by better technology and craftier drilling and better data, doesn’t actually increase the rate of production from that field.  It just slows down the rate of decline.  What is important to realize is that the crop of fields that we have today is losing production every year by natural decline.  For arguments’ sake, let’s say it’s 3 million barrels/day every year being lost.  That decline cannot be reversed by reserves growth to older fields; reserves growth is making them last longer but it isn’t making them produce faster, it’s just holding global decline to that 3 million barrels/day per year.  If you want to replace that 3 million barrels per day lost every year, you have to do most of it with new discoveries.  And new discoveries equal basically only half of annual consumption.

This is why I use the ATM analogy: it doesn’t matter how much money you’ve got in your account, you’re still limited by the daily withdrawal limit.

It’s also fair to point out that although reserves have been growing year by year, it hasn’t stopped the price from jumping, which suggests that there is a supply issue there somewhere.

Q: You refer to the widely used phrase—“it’s not so much the size of the tank as it is the size of the tap.”  Care to comment on what the bottom line message is there?

Miller: Nobody should be misled by discussion of the size of global reserves.  What matters is the speed at which you can get them out, and that speed is limited by physics and engineering and money.  Very basic stuff.  If you really really wanted to get the existing reserves out faster, it would cost too much to buy.  So there is a rational size to the tap that you can have.

Q: You were quoted as saying we can’t grow the supply at the average rate of 1.5% per year at today’s prices.  What sort of price do you think it would take to grow supply at that rate?

Miller:  The kind of number that comes to mind is about $150 a barrel, but it’s a complete spectrum. The marginal new barrel at the moment might be in the Canadian oil sands or Venezuelan heavy oil, and starting new production could cost $130 or $140 a barrel.

To grow by 1.5% per year, I don’t think it would be long before you got up into the $180 range.  And that’s a price that breaks economies.

Q:  You mention in your paper that natural gas liquids can’t fully substitute for crude oil because they contain about a third less energy per unit volume and only one-third of that volume can be blended into transportation fuel.  In terms of the dominant use of crude oil—in the transportation sector—how significant is the ongoing increase in NGLs vs. the plateau in crude oil?

Miller: The role of NGLs is a bit curious.  You can run a car on it if you want, but it’s not a drop-in substitute for liquid oil.  You can convert vehicle engines in fleets to run on liquefied gas; it’s probably better thought of as a fleet fuel.  But it’s not a substitute for oil for my car.  By and large, raising NGL production is not a substitution to making up a loss of liquid crude.

Q:  You’ve also been quoted as saying that “we’re probably in peak oil today, or at least in the foothills.  Production could rise for a few years yet, but not sufficiently to bring the price down.  Alternatively, continuous recession in much of the world could keep demand essentially flat for years at today’s price of $110” [the Brent price].  Yet there are several commentators who believe that prices are setting up for a modest decline.  If prices did drop, say $20 over the course of a year, what impact do you think that would have on world oil supply on down the road?

Miller: I think you first have to ask yourself, why would the price fall?  You have two possible reasons.  One would be an increase in supply of cheap oil.  The other would be a decline in demand—a continuation of the current recession.  If the price does drop $20, I think it will be more of a signal that world economies are floundering and demand is sinking.

I suspect what we’re looking at into the future is a long set of short-term oil price and economic cycles.  At the moment, the US economy is pulling a bit ahead, and the extra oil that involves is probably being produced by shale oil, so it’s not putting an extra load on global demand.  But if the European economy tried to pull ahead, it would pull up oil demand, and that would be enough to raise the world oil price.  And I think we’re probably operating at the maximum price that we can afford at the moment.  If the price goes up, the economy slips into recession, demand goes down, oil price goes down, people start buying more oil and the economy goes up again.  It becomes an oil price saw tooth that will probably never quite fall as low as it was before, it always keeps the price generally trending up.

Q:  A sobering point you make in your paper is the following: there is a substantial risk of a sustained decline in global conventional production that begins before 2020.  Why do you think that point is so under-appreciated, especially by policy makers?

Miller:  Policy makers are only in there for the short haul.  Policy makers answer to politicians and politicians answer to the electorate, and the electorate votes its pocketbook.  Politicians have to say whatever’s going to keep them in power, to get them re-elected; only when re-elected can they “do something useful” for the country.  To be re-elected, they have to grow the economy.  In the UK today that’s why whenever there’s a conflict between the Dept. of the Environment and the Treasury, the Treasury wins.  That’s also why the government wants to go fracking in the UK.  They will do anything to try to reduce the price of energy because that will help the economy to grow.  All of which means they cannot acknowledge the longer term problems.

The Chinese are more rational about all this.  They get peak oil and they get climate change.  But they also get that they have to finish hooking up their far-flung populations to electricity supplies and to create a bit more personal mobility.  Without that they have civil unrest, with people still flooding in from the countryside where they might become useless and uncontrollable.  So their bigger problem for now is also growing their economy.

It’s just a mess.  Bottom line: we don’t have a shortage of resources, we have a longage of people and a serious longage of their expectations.

Q:  Tight oil in the U.S. seems to be viewed by many commentators as a long-term savior in the energy realm, at least on this side of the Atlantic.  How would you characterize the role of tight oil, both for the U.S. and elsewhere around the world?

Miller: For the U.S. case, I’m fairly certain that tight oil is going to be quite a transient bubble.  Tight gas, I think, might have more legs to it.

I say transient because of things such as the decline characteristics of the oil wells, the fact that it seems to be the oil sweet spots that make the difference—all the stuff that’s well known.  The sheer rate at which you have to drill new wells simply to have production stand still, and to keep paying dividends, is quite amazing.

I think some of the early US forecasts of just 2.5 to 3 million barrels a day from shale oil were pessimistic; the industry will probably do better than that.  But I also think that seeing it top out and decline in the early 2020s looks to me like a good guess at the moment.  It’s still very much guesswork.

When you move out to the rest of the world, there aren’t so many places where shale oil might work for you.  It might work in parts of Australia, China, Russia, South America, but not in any place like Western Europe or parts of Asia which have high population concentrations because this is not an industry that is compatible with high population density.  That’s because the upheaval involved in the process affects far more people, and because the economic benefits are spread out among far more people, so there is less benefit per head.  I think that is one of the factors that may even stop shale development in Europe.

Q: In your paper you wrote, “The multiple forecasts of regional and global peaks that have been made since the 1950s have frequently proved premature.  More optimistic forecasts have often proved equally incorrect, but it takes longer for their errors to become evident.”  Where does this leave the broader energy dialogue in terms of the role of peak oil and the world economy?

Miller: First, I don’t think that anyone’s past forecast has got anything to do with current forecasts.  The fact that someone else made a call, based on the best information that was available at the time, and that call has subsequently turned out to be wrong, is an interesting fact.  But what has it got to do with any new estimate?  There’s just no connection.  I’m sure some people will say, “Well you’re connected because you’re using the same methodologies.”  Sometimes we do, sometimes we don’t, but we’re using better data and have much more experience. We should be getting closer and closer to a good estimate.

But we don’t even know what the shape of the peak is going to be—whether a sharp peak or a long, undulating plateau.  I suspect it’s going to be the latter.

The charge that—because all previous estimates have been wrong, therefore all future estimates are going to be wrong as well—is just ludicrous and completely unscientific.  I can’t be bothered to listen to that anymore.

Consider this: if you did a distribution curve of all estimates of the date of peak—say from the early ones in the 1990s to the most forward estimate of a peak in 2100—and you’ve got a bell-shaped distribution, then somewhere in the middle of that bell shape is the correct answer, but we won’t know it until we’ve gotten there.  Of course, at the peak all the premature estimates will already have been proven premature because you’ve already passed the dates and been proven wrong.  But how do you prove someone wrong who says it won’t be until 2100?  You can’t prove him wrong by direct experience; you can only prove him wrong by argument, at which he just shrugs his shoulders and dismisses it.

Where people have got it demonstrably wrong is folks like the IEA and EIA when they make price forecasts into the future and extrapolate demand into the future.  Now it’s not the same as forecasting volume and supply, but nevertheless they are forecasting into the future.  And they have been just horribly wrong, when you look how prices have deviated from their predictions, projections, forecasts, scenarios—whatever word they use.  And you can see that they are no better today than the old peak oilers of the past who got the date wrong.

Q: About the IEA’s forecast of global liquids supply growth through 2035, you commented “The IEA projection assumes adequate investment, no geopolitical interruptions and prices that do not significantly constrain global economic growth.”  How do you view the odds of those three trends not impacting global liquids supply growth for the next 20 years?

Miller:  The IEA’s brief, of course, is not just to follow problems but to supply answers to governments, and the best answer they can come up with to maintain supply is probably the only possible answer for them—there will be sufficient investment.  As I mentioned earlier, you could increase supply for a while longer if you threw enough money at it.  But it seems inevitable to me that that would raise the price to a level that we can’t afford.  And their price forecasts in the past have been horrible, so I don’t think their price forecasts in the future will necessarily be any more reliable.  So I don’t think they’re going to get away with a nice scenario—prices we can afford, no geopolitical conflict and sufficient investment.  That is a trio that has not happened in the past and isn’t likely to happen in the future either.

Here’s an interesting little fact: next year, 2015, might be the first year in a century that Britain hasn’t been at war, so don’t talk to me about lack of geopolitical conflict.

Q: Anything you want to add?

Miller:  I’ve had little or nothing new to say.  What I’ve said above is all words that have been used before.  I’m just another grain of sand in the pile.

I would like to see more solid reliable papers printed on this topic; there is far too little about that.  People say policy has to be driven by evidence; okay, we have to give them sizable, quantifiable, peer-reviewed evidence.

Perhaps there’s one more point to add, a despairing observation—we’re not going to get this one right until we get a government in place that is prepared to take these issues seriously and act as genuine statesmen, instead of being driven by short term goals set for them by economists who really don’t understand the problem.

I’m starting to diverge out of the oil and energy arena here to say things like: why do we have to have an economy that grows continually? It’s not the only model.  It may be the model that’s worked for the last 150 to 200 years but it’s not the only model.  And it’s the model that’s going to fail when the less expensive energy sources dwindle.  But you just cannot get a democratically elected politician to take notice of that because it’s against his short-term interests.  The only people who can do it tend to be folks like the Chinese and Russians who really don’t care about the democratic process and as a consequence can take very much longer views of things.  That’s the kind of comment that makes me persona non grata to anyone who’s reading this.  I’m not calling for dictatorships, tyranny or the rest of it.  I am saying that we have to find a way to get a democracy to take a meaningful look into the future that includes worrying about things like climate change and energy supply and the fact that you cannot grow an economy forever and to look at possible intelligent responses.  Are there truly “solutions” or are there just some responses that smarter than others, under the circumstances?

To get there, what I really hope is that we do not experience a sharp peak in oil supplies.  I would like to see a slow but inexorable rise in price that constrains consumption and lasts for decades.  That would be a more controllable situation than one in which populations rise up and, essentially, tear each other limb from limb.

Over here in the UK we’ve had essentially two months of unending storms, the worst since records were kept over 200 years ago.  Now what this has done is that it has gotten newspapers to start saying on the front covers: “this is climate change, this is happening and what are you going to do about it?” Well, if the same thing happened for fuel supplies—if one day we could see a headline that says “This is what peak oil feels like; what are you going to do about it.”…  It’s not that you couldn’t get fuel; you just couldn’t afford so much of it any more.

The worst case scenario is that we keep desperately trying to find and produce more oil such that it brings us to a sharp peak.  If we get a sharp peak, we would simply get civil unrest and collapse, maybe in the space of a couple of years because that’s how quickly it could be.  A loss of 5+% of global supply in two years would just be awful.  But if we have a long slow decline in production with slowly rising prices—a bit like being in a war situation—none of the price change points would be sufficient to cause riots in the streets.  So, that’s what I hope.

And remember in the meantime, when people say “peak oil is dead,” ask them “has the price gone down?”

Thanks for your time and your thoughts.

ASPO-USA