ICYMI: Summer 2016 Oil Recap

Autumn has arrived. And here's a collection of Summer 2016 oil stories you may have missed:

Here Dr. Nafeez Ahmed gives us a Peak Oil update by way of reviewing the new paper "Energy shift: decline of easy oil and restructuring of geo-politics." He writes that the authors, "refute what they call 'a common misperception about peak oil': that fossil fuels are growing scarce. Rather, they argue, peak oil means it’s getting more difficult and costly to get oil out of the ground—and there’s less of the cheaper, easy oil available. "

Recall that the definition of Peak Oil is simply the "maximum rate of oil production" - every one of those words is critical. And a great deal stands on how one chooses to define the word "oil." Total global oil production has not yet reached a peak, but what we do know is that conventional oil production clearly has peaked. Yet total oil production has continued to climb due to growth in unconventional production. The paper's authors, as well as Dr. Ahmed, remind us that while it's important to focus on total global oil production, it's also important to acknowledge and understand the significance of the changing ratio between conventional and unconventional production. Total oil production today is vastly different than it was 15 years ago.

In the Pacific Standard, noted Peak Oil author Richard Heinberg examines the issue in the context of an industry squeezed on both sides - by rising production costs and lower oil prices. Heinberg writes:

"The problem of eroding energy profitability is hard to deal with partly because the decline is happening so fast. If we had a couple of decades to prepare for falling thermodynamic efficiency, there are things we could do to soften the blow. That’s what the peak oil discussion was all about: It was an effort to warn society ahead of time. Once the dynamic of declining energy profitability really gets rolling, adaptation becomes much more difficult... We need to build a bridge to the energy future, even while the highway we’re on is crumbling beneath us."

In Bloomberg, Mikael Holter highlights the little noticed shortfall in conventional oil discoveries:

"Explorers in 2015 discovered only about a tenth as much oil as they have annually on average since 1960. This year, they’ll probably find even less, spurring new fears about their ability to meet future demand."

A famous ASPO chart from the past decade was known as the "Growing Gap" chart. It showed conventional oil discoveries and oil production and a gap between ever increasing production and the high points of oil discoveries which occurred in the 1950s and 1960s. Diego Mantilla updated the old growing gap chart based on the new WoodMac data highlighted in the Bloomberg article to produce a new graphic:

Diego Mantilla's updated "Growing Gap" chart

Meanwhile, in Forbes, noted Peak Oil critic Michael Lynch was quick to point out that the decline in conventional discoveries is no big deal writing "...will the poor exploratory performance persist? Probably not, as companies adjust their budgets, use up projects in the development pipeline, and costs come down as the overheated upstream sector has cooled. Then, too, the more money that goes into shale, the less the need for expensive conventional fields—and the less the need for discoveries."

Part of the reason for the decline in oil discoveries is simply due to the low oil prices that are resulting in investment declines. Finding oil costs money and it's hard to make those investments when low prices are squeezing you so tight that you're struggling to keep the light bills paid.

On their blog, WoodMac recaps the carnage:

"The dramatic fall in oil prices – from over US$100 a barrel in mid-2014 to less than US$30 a barrel in early 2016 – has left the oil industry scrambling to contain the damage. Upstream operators are deferring investment decisions, cutting activity and headcount and putting pressure on suppliers. Governments faced with falling oil revenues are reviewing fiscal terms. Service companies have responded to thin order books by reducing capacity. In the case of the Majors, cash for dividends now means increased borrowing."

Way back at CERAWeek in February, IEA Executive Director Fatih Birol was raising alarms on these investment cuts: "It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall," Birol said. "The historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future. Last year, oil capital expenditures (capex) declined by 24 percent, and this year we expect an additional 17 percent. This is historic, because in the last 30 years we have never seen oil investment decline in two consecutive years. If there was a drop one year, the next year there was a rebound. We expect this drop to have both short and long term implications for oil markets."

In a recent report, John England and Andrew Slaughter at Deloitte conclude that, at minimum. the global upstream industry will need to invest about $3 trillion during 2016-2020 to ensure long-term sustainability.

It's an open question if anyone actually wants to spend that money for less than stellar returns. Recall Steven Kopits' wonderful talk from over two years ago where I wrote:

"Kopits addresses the "flatness" of oil production since 2005, and why the decline has not been steeper. In short, this is because we threw a lot of money at it to the tune of $3.5 trillion spent maintaining the legacy oil and gas system since 2005. What did we get for all this invested money? Sadly what we got was a decline in legacy oil production of 1 million barrels per day (mbpd)."

If you are a member of the "Peak Demand" school which suggests a near-term peak and fall of worldwide oil demand, you know that lower demand = lower oil prices = making all of these investment problems even worse.

Or if you're a member of the traditional "Peak Supply" school, then you see thermodynamic and geologic constraints to future oil production growth, no matter how much money we throw at the problem.

Either way you can see a path to reaching a "maximum rate of oil production" otherwise known as: Peak Oil.