"Peak Oil": Towards a Possible System Breakdown?

There are many who question if there will be enough reserves to actually fuel economic growth. They refer to a possible date where production will inexorably start to decline as “peak oil”. “Peak oil” is first of all technical data, which can be measured for every field. There is indeed a point in time in field extraction where production maxes out. Progressively, as resources diminish, it becomes more difficult to extract the remaining oil and daily production declines. Conditions of pressure and access to resources make it indeed more complicated to collect the remaining oil after the “easy” oil has been extracted. The world’s “peak oil” thus adds up all production “peak oils” from all fields in the world. Evaluating “peak oil” is very complicated due to the relative lack of knowledge of each field’s geology. The exact volume of reserves is unknown, only estimated, and the actual quantity of oil that can be extracted is even more difficult to predict because of the geological particularities which can limit or facilitate field extraction.

This technical definition of “peak oil” only accounts for “proven” reserves. “Probable” resources then need to be added to gather the overall “retrievable” resources. Resources are estimated to be “retrievable” with current state-of-the- art technologies. They can consist of improvements over existing fields or operation of new fields. Many uncertainties remain over the actual capacity to recover totally these reserves, which is why they are not classified as “proven”. Everything has been said and written on “retrievable” resources. Oil exploration intensified following the two oil crises of the 1970s. Large oil companies and governments tried to diversify their procurement to limit their dependency on the Organization of the Petroleum Exporting Countries (OPEC) countries. Many limits and roadblocks were overcome: geographically, exploration reached new frontiers (Latin America, Africa, the Arctic, deep offshore) and technically, the development of unconventional oil (extra heavy crude, shale oil, etc.) radically modified the oil resources landscape. Actually, the increase in reserves is mainly due to significant efforts realized in these domains. Since 1970, one trillion barrels have thus been discovered, representing 40 years of global oil consumption. However, annual oil consumption (around 36 billion barrels a year) today exceeds new discoveries. Therefore, the volume of reserves is diminishing. In addition, 70% of the increase in “proven” reserves (© OECD/IEA 2014) has come from the reevaluation of existing fields.

There are today 1.7 trillion barrels of “proven” reserves (BP 2014), which corresponds to 238 billion tons. There are also about 2.6 trillion barrels of conventional “retrievable” reserves (Furfari 2007), or 364 billion tons. Unconventional resources (asphaltic crude, extra heavy crude or shale oil) represent 3.1 trillion barrels of “retrievable” resources (or 435 billion tons), which can also be added to

Oil reserves (BP 2014; Furfari 2007; © OECD/IEA, WEO 2012)

Fig. 3.8 Oil reserves (BP 2014; Furfari 2007; © OECD/IEA, WEO 2012)

Retrievable oil reserves (BP 2014; Furfari 2007; © OECD/IEA, WEO 2012)

Fig. 3.9 Retrievable oil reserves (BP 2014; Furfari 2007; © OECD/IEA, WEO 2012)

the previous figure, leading to an overall 5.7 trillion barrels of overall “retrievable” oil reserves (© OECD/IEA, WEO 2012), or 795 billion tons (Figs. 3.8 and 3.9).

World consumption today is up to 100 million barrels per day. Assuming zero increase in consumption, current oil reserves should correspond to around 150 years of production. Reserves are often measured using only “proven” reserves, which amounts up to 1.7 trillion barrels (BP 2014), or 50 years of production at the current consumption rate. However, the figure presents a wrong perspective of the reality as it implies “retrievable” reserves cannot actually be recovered and does not account for unconventional oil reserves.

To sum up, today, there are in reserve 50 years of conventional oil production at the current rate, likely twice more when conventional “retrievable” reserves are taken into account, and finally around 150 years of production when non-conventional oil reserves are included.

The discovery and exploitation of non-conventional oil in North America disrupted the balance of power in oil that had been in place since World War II. Henceforth, the core of worldwide oil reserves is situated in North America. The huge gap between identified reserves in North America and elsewhere also suggests that exploration may not have been conducted completely in other regions of the world, where additional reserves could be identified in the coming years.

While new “retrievable” oil reserves have been identified, their discovery happens at a slower rate than consumption. Still, the total amount of “proven” reserves increases year after year. There will therefore not be any catastrophic oil shock in the coming years. Be that as it may, a number of events could possibly impact and raise tension in the overall state of reserves and worldwide oil production. Geopolitical events could indeed influence access to resources and therefore prices, available resources, and exchanges across countries. The speculation in oil prices as well as the reactive measures that could be taken by the various market players could impact the investment capacities of oil companies; investment in new oil fields is the only way to replace old fields which have reached end of life. Beyond oil price, political decisions to diversify the mix of oil imports in high- consumption countries could also influence the overall flows of oil exchanges and therefore the access to investments from specific regions of the world. This could in turn have an impact on overall production capacity. The “peak oil” might therefore well happen, but not likely because of a lack of “retrievable” resources. More likely, it might happen because of a sustained imbalance of investments compared to the evolution of demand.

In summary, the “peak oil” is technically interesting but often dealt with too simplistically. The question of “peak oil” actually relates to the balance between consumption, production and the discovery of new reserves. Today, reserves continue to grow, albeit at a slower pace than that of consumption. This pace could pick up if more exploration investments were triggered. Production adapts to consumption forecasts, and the necessary investments are only triggered if they are considered profitable with regards to oil price. The “peak oil” could thus occur from “proven” reserves progressively drying out simply because of a lack of investments. However, it will almost certainly not occur from exhaustion of “retrievable” resources. The “after oil” period is ahead of us and what will happen depends on a multitude of geopolitical, economical and technical factors. The question is a delicate one as the combination of these factors remains uncertain. In the end, we could quote John Mitchell (Furfari 2007), an expert in oil economics matters: “oil reserves are unknown, cannot be known, and are not important”.

 
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