The world has anticipated the “rapid exhaustion” of crude oil supplies for at least 100 years.
Will it go on being close to running out of crude for the next 100?
“Peak Oil” — the idea that global oil production will soon reach a maximum and then begin to decline — attracted a significant number of believers in the 1990s and early 2000s.
Then unconventionals happened.
Unconventional resource production blossomed in the United States. With rising crude production, the U.S. stopped soaking up the world’s excess oil supply.
Instead of cutting back crude production to balance the market, Saudi Arabia increased production to protect its market share.
And ta-da! — we got a global glut of crude and liquids, along with a truly major price collapse. Today, you are more likely to hear people talk about a possible worldwide peak in oil demand rather than a peak in oil production.
But the principal arguments for Peak Oil haven’t changed much.
Prophets of a production maximum point out that the worldwide discovery of giant and supergiant oilfields peaked in the 1960s and has fallen off sharply since then. As more and more of those giant oilfields go into decline, they say, world crude production inevitably will decline also.
Also, recent international exploration results haven’t been pretty.
“Oil discoveries declined to 2.4 billion barrels in 2016, compared with an average of 9 billion barrels per year over the past 15 years,” the International Energy Agency (IEA) reported in its annual outlook.
“Meanwhile, the volume of conventional resources sanctioned for development last year fell to 4.7 billion barrels, 30 percent lower than the previous year as the number of projects that received a final investment decision dropped to the lowest level since the 1940s,” according to the IEA.
Basins That Keep On Giving
Are we destined to see a global peak in crude production?
“Everybody thinks in terms of long cycle, which is the conventional route. Those include near onshore and deepwater,” said Charles Sternbach. “We’re seeing a boom in the short cycle.”
Sternbach is president of Star Creek Energy in Katy, Texas, and, as of this month, the new president of AAPG. He noted the industry’s shift away from conventional, long-term oil exploration and development projects that might take 10-15 years to come online and toward unconventional resource plays and other projects that can begin production in 3 years or less.
“In the old days, oil companies funded long-cycle projects,” Sternbach observed. “Now we’re seeing a proliferation of investment companies entering the industry. These efforts are for short-cycle, and that’s substantially new for the industry.”
These short-cycle projects aren’t typical exploration and development efforts. Low-porosity plays produce high production immediately after drilling and completion, mostly with hyperbolic decline curves. They allow operators to drill thousands of wells in a play area and bring lots of oil and gas to market quickly.
As an example of this new approach, Sternbach cited the investment and the work that has boosted production in the Permian Basin in West Texas.
“The Permian Basin is a phenomenon. It’s the prototype of revitalizing superbasins around the world,” he said.
The basin appeared to peak out in production around 1976, when it topped 500 million barrels per year of crude-plus-liquids output. After that, production dropped steadily.
“It was on a dismal decline. It was downhill, downhill, downhill. And you thought, ‘The party’s over,’” Sternbach said.
Then, about 10 years ago, horizontal drilling and hydraulic fracturing brought a Permian Basin renaissance.
Production shot upward and eventually passed 2 million barrels per day, easily besting the 1976 peak. Estimated remaining recoverable reserves of over 80 billion barrels are more than twice the basin’s cumulative production to date.
“One of the things I want to talk about as AAPG president is taking the industry to where the oil is, and that’s the superbasins,” Sternbach said.
He thinks exploration and development need more focus on “going back to the basins that keep on giving.”
IHS Markit has done a promising study of superbasins and other large and potentially productive basins around the world, according to Sternbach.
“They’ve identified 25 global superbasins, and there are many other tier-two basins. The potential uptick is about 800 billion barrels of oil,” he said.
Cheaper and Cheaper Production
Scott Nyquist is senior partner in global energy practice for consulting firm McKinsey & Company in Houston, and a member of the firm’s board of directors.
“We’ve been doing these reports on oil supply and oil demand throughout my career,” said Nyquist, who has been at McKinsey for 30 years. “We never bought into the notion of true peak supply. We see a huge resource reserve out there.”
At this moment, he said, the crux of the crude oil supply and price debate is between “lower-for-longer” and “lower-forever.” Nyquist’s personal view is that recent underinvestment by the oil industry will tighten the market and require some catching up in crude production.
But in a counter argument, he said, when other countries begin deploying technologies like horizontal drilling and hydraulic fracturing, there’s “a perpetual story where every year we see a new low-cost source of supply coming on,” and the industry keeps getting more efficient in producing crude.
“Deepwater costs have come way down, for example, as designs are simplified and efficiencies come on. There’s also a more granular understanding of the reservoirs,” he noted.
Prolific energy production, substitution for oil use by other sources and supply level uncertainties present another problem for long-cycle investment decision making, according to Nyquist.
“We call it ‘the era of abundance.’ There’s lots of interfuel competition coming out that makes it difficult to plan longer-term projects,” he noted. The uncertainty over switching and supply “just makes it difficult to plan investments for these long-cycle projects.”
That doesn’t mean the oil industry will or should abandon long-cycle exploration and development.
“There are a lot of conventional, long-cycle plays that have become available because of enhanced imaging,” Sternbach observed.
In an AAPG Discovery Thinking presentation earlier this year, he noted that the world still holds numerous untapped, thick sedimentary deposits offshore and cited recent exploration successes in Atlantic conjugate margins.
“A lot of the really big global discoveries are affected by the Tethys Sea, which basically offers a Jurassic and a Cretaceous source rock, so there are multiple source rocks,” he said.
The concept of Peak Oil developed from a theory put forth by America geoscientist M. King Hubbert. Based on overall reserve estimates and the pattern and history of field discoveries in the United States, Hubbert created a composite, mega-decline curve that predicted U.S. crude oil production would peak in the 1965-70 time period.
And U.S. oil production did reach a peak, a little later than the original Hubbert curve predicted. But with the discovery of North Slope oil in Alaska, production began to increase again. The domestic Peak Oil estimate was re-labeled as a Lower 48 prediction.
Now, it appears that Hubbert’s approach predicts a profile for conventional oil production in a defined geographic area, when technological development and oil prices remain within limited bounds.
“When people ask, ‘How much oil is there?’ the answer is, ‘At what price?,’” Sternbach noted. “Things like tar sands could release huge amounts of oil at the right price.”
Breakthroughs in technology, especially horizontal drilling plus hydraulic fracturing — call it “hydrozontal development” — combined with today’s improved exploration and production tools have reversed the U.S. oil production decline.
In its June energy outlook, the U.S. Energy Information Agency forecast that U.S. crude production will reach an all-time high of more than 10 million barrels per day (b/d) in 2018, along with 4.19 million b/d of natural gas liquids and 1.02 million b/d of ethanol.
Instead of Peak Oil, the world has gotten a peek at a new energy future.
Innovation is “ increasing the value of the resources and it’s reducing the cost of getting to them. When those two things combine, you get to a sweet spot,” Sternbach said. “That’s a paradigm shift that creates waves of increased value.”