# The Oil Shock Model with Dispersive Discovery- Simplified

This is a guest post by Dennis Coyne

Originally posted at peak oil climate and sustainability

Some changes have been made to this post see after the Excel File link.  Below figure 10.

The Oil Shock Model was first developed by Webhubbletelescope and is explained in detail in The Oil Conundrum. (Note that this free book takes a while to download as it is over 700 pages long.) The Oil Shock Model with Dispersive Discovery is covered in the first half of the book. I have made a few simplifications to the original model in an attempt to make it easier to understand.

Figure 1

In a previous post I explained convolution and its use in modelling oil output in the Bakken/Three Forks and Eagle Ford LTO (light tight oil) fields. Briefly, an average hyperbolic well profile (monthly oil output) is combined with the number of new wells completed each month by means of convolution to find a model of LTO output.

In the Oil Shock model the maximum entropy probability distribution is analogous to the average well profile and the annual oil discoveries are analogous to the number of new well completions in my LTO models.

The maximum entropy probability distribution is used when we know there is a probability distribution but we have very little information about what it looks like. In this case, the only assumption that is made is that a probability distribution exists and that it has a positive mean and a standard deviation. The maximum entropy probability distribution sets the mean equal to the standard deviation and has the form

m=k*exp(-k*t)

where

m=probability that a discovery will become a producing reserve t years after discovery,

k=a constant set at 0.05 in my models, where 1/k is the mean number of years from discovery to producing reserve (20 years), and

t=years from discovery to producing reserve.

This is also called the negative exponential distribution see

http://en.wikipedia.org/wiki/Exponential_distribution

The maximum entropy principle was first proposed by E.T. Jaynes see

http://en.wikipedia.org/wiki/Edwin_Thompson_Jaynes

If 1000 kb was discovered when t=0 and if m=0.049(or 4.9%) when t=1, then 1000*0.049=49 kb of new producing reserves are added to cumulative producing reserves in year 1. (Where year 1 means one year from the date of discovery.)

Chart below shows the Maximum Entropy Probability (MaxEnt), m vs year from first discovery.

Figure 2

Figure 3

http://www.theoildrum.com/node/10009

The figure above is from Jean Laherrere’s final post at the Oil Drum (figure 7) at the link above. The figure below is figure 9 from the same Oil Drum post.

Figure 4

These two charts were used to estimate backdated discoveries of proved plus possible (2P) C+C excluding extra heavy(XH) oil reserves from 1901 to 2010, I read the data from the charts as best I could. (The green curves in both figure 3 and figure 4.) In my opinion Jean Laherrere provides the best oil discovery estimate that is publicly available.

In an attempt to match Jean Laherrere’s model, I used Webhubbletelescope’s dispersive discovery model and fit this model to the discovery data.

The dispersive discovery model describes cumulative discovery, D in the following equation

D=U/(1+C/t^6) where

U=URR=2,200,000 million barrels (for the model presented here),

C=constant determined by best fit to discovery data, in this case C=800 trillion, and

t= year where t=0 is 1870, t=1 is 1871, etc.

The rationale behind this equation is developed in The Oil Conundrum in Chapter 9, pp 167-177, particularly pp. 170-171 equations 9-25 and 9-28. The combination of those two equations is the basis for the cumulative discovery(D) relationship above.

The chart below shows the model fit to Jean Laherrere’s discovery data. The vertical axis is millions of cumulative barrels discovered.

Figure 5

The following chart shows yearly discoveries(real), the centered 25 year average for discoveries and the dispersive discovery model. Vertical axis is millions of barrels per year.

Figure 6

The discovery model can be convolved with the maximum entropy probability distribution to find the new producing reserves (n) that are added to the cumulative producing reserves (P) each year using a simple spreadsheet to add it all up. In the chart below the vertical axis is millions of barrels per year of new producing reserves (reserves which begin producing in a given year.)

Figure 7

The next step is to find the cumulative producing reserves, P. Each year oil is extracted from P and new reserves (n) are added.

P2=P1+n-e where

P2 are the cumulative producing reserves at the end of year 2

P1 are the cumulative producing reserves at the end of year 1

n= new producing reserves added to P1 in year 2

e= oil extracted (or produced) from P1 in year 2

r=e/P1= extraction rate

Actual production data for C+C-XH is used to determine the extraction rate necessary for the model to match the output data. The chart below shows the cumulative producing reserves and extraction rate for C+C less extra heavy oil which matches the output data from 1960 to 2014.

The model from 2015 to 2050 is based on the underlying model for new producing reserves added each year and the assumed extraction rates. These rise a little from 2015 to 2021 from 5.5% to 5.8% and then remain flat. Over the 2009 to 2015 period extraction rates rose from 4.7% to 5.5%.

Figure 8

Below is Jean Laherrere’s estimate of 2P technical reserves for C+C-XH, from the Oil Drum Post referenced above.

Figure 9

In 2010 the model producing reserves are about 62% of the 2P technical reserves estimated by Jean Laherrere(850 Gb in 2010).

For more mature regions, such as the US and Norway, producing reserves are about 78% to 80% of 2P reserves when we assume 2P reserves are about 33% higher than 1P reserves for the US (Norway reports 2P reserves, but the US EIA reports 1P reserves).

This model uses a separate model for extra heavy oil because the time it takes to develop extra heavy oil resources is different from C+C-XH. There are 500 Gb of extra heavy oil URR and 2200 Gb of C+C-XH URR for a World total C+C URR of 2700 Gb. This C+C URR matches Jean Laherrere’s February 2013 estimate, see

http://aspofrance.viabloga.com/files/JL_2013_oilgasprodforecasts.pdf

pages 21 and 22 suggest a possible C+C less extra heavy URR of 2600 Gb, but it is decided that the creaming curve gives more reliable results and a URR of 2200 Gb is used. On page 35, figure 53 the world C+C forecast is shown. Figure 1 below is the Oil Shock Model result with a URR of 2700 Gb and the assumptions outlined above ( for future extraction rates, time from discovery to producing reserves, and the discovery model matching discovery data).

Figure 1

Any changes in these underlying assumptions would change the model output, in particular future extraction rates and discoveries are unknown and could be either higher or lower than assumed in the scenario presented. Note that the extra heavy oil model is more conservative than Jean Laherrere’s model which peaks at about 15 Mb/d in 2070, my extra heavy oil model peaks at about 10 Mb/d in 2050 (compared with 11.5 Mb/d in 2050 for Jean Laherrere’s extra heavy oil model). The overall C+C model I present is somewhat more pessimistic than Jean Laherrere’s model, for example C+C output is about 6 Mb/d lower in 2050.

The following chart shows the discovery model, new producing reserves, and C+C-XH output in Gb per year.

Figure 10

In the original Oil shock model there were several stages between discovery and production called fallow, build, and mature. Each stage involved convolution similar to the convolution I used here with the maximum entropy probability distribution and the discovery data, but in the original model there were three such maxent probability distributions and three convolutions rather than just one.

It seemed too complicated to explain all that so I collapsed the fallow, build, and maturation stages of the original model into a single convolution where we go directly from the discovery stage to the new producing reserve stage (which is essentially the same as the mature reserves of the original model.)

In a future post I will show how potential reserve growth could lead to a higher URR of C+C less extra heavy oil than suggested by Jean Laherrere. This implies that the model presented here may be a little on the pessimistic side.

Excel Spreadsheet with model at this link.

I made an error calculating the ratio of US producing reserves to 2P reserves.

If we assume 2P reserves are 25% higher than 1P reserves then the 1996 to 2011 average for the US is about 61% rather than the 78 to 80% I claimed in the original post.  As the US is one of the most mature oil provinces in the World, it is unlikely that the World average producing reserve to 2P reserve ratio would be higher than the US, but the model presented suggests exactly that and needs to be reworked, this is due to my initial error calculating the producing reserve to 2P reserve ratio in the US.

If we change the value of k for the maximum entropy probability distribution to 0.04 (from 0.05 in the original model) and adjust the extraction rates so that output from 1960 to 2014 matches EIA data we get the following.

This entry was posted in Uncategorized and tagged , , , , . Bookmark the permalink.

### 476 Responses to The Oil Shock Model with Dispersive Discovery- Simplified

1. Sam Taylor says:

Dennis,

This is very interesting, thanks. In my spare time I’m working through the oil conundrum, but my maths is a bit rusty so it is taking longer than I’d anticipated, but I think I largely comprehend the most important points. Anyway, could you perhaps quantify “a little on the pessimistic side” more precisely? Your final chart has global production down by around 40% by 2030, which is more than a little pessimistic from where I’m standing!

• Dennis Coyne says:

Hi Sam,

The chart in figure 10 (last chart of the post) does not include extra heavy oil, so use figure 1 which is the C+C scenario. In a future post I will use the 2600 Gb estimate that Jean Laherrere thought was too optimistic but was based on two Hubbert Linearizations of OPEC and non-OPEC countries separately, but I will leave the extra heavy oil estimate (from Canadian and Venezuelan oil sands) unchanged at 500 Gb. I believe that estimate to be more realistic. The optimistic case would be using the USGS estimate for C+C less extra heavy of roughly 3000 Gb, again leaving the extra heavy oil at 500 Gb(the optimists think this should be 1000 Gb, but it makes little difference through 2070.)

Also note that C+C output declines from 77 Mb/d to 58 Mb/d in 2030 which is about 2% per year, the realistic scenario would decline less steeply unless output remains on a plateau for several years (maybe until 2019), the longer output stays high, the steeper the decline once it begins, there are an infinite number of possible scenarios, but more oil over the near term means less oil in the future for any given URR.

• Fred Magyar says:

Also note that C+C output declines from 77 Mb/d to 58 Mb/d in 2030 which is about 2% per year, the realistic scenario would decline less steeply unless output remains on a plateau for several years (maybe until 2019), the longer output stays high, the steeper the decline once it begins, there are an infinite number of possible scenarios, but more oil over the near term means less oil in the future for any given URR.

58 Mb/d in 2030?! That’s only 15 years from now. Am I the only one who thinks those numbers are really scary?

Given that a number of different sources such as the UN, the World Food and Agriculture Organization, WHO and others all say that global human population will be around 8.5 billion in 2030, it seems to me, that barring some as yet unforeseen technological miracle, the only possible scenario that I can come up with if we try to maintain the current BAU paradigm, is not very pleasant to say the least. How will the diminishing pie be distributed equitably without major global conflict? To keep things in perspective the US currently has about 5% of the global population and gets to use about 25% of global energy resources. So if US lifestyles continue to be non negotiable, I don’t think Kumbaya is going to cut it!

I think the times they are a changing. Or maybe the answer my friend is blowin in the wind…

• Fred …

You have the picture ….

This (and Climate Change) are the reasons I have taken on the exercise of

energy transformation of a Home, Museum, Lifestyle, Food Production …

I have grandkids … 3 beautiful ones. They are smart and talented (Piano / Chess Champs, / Competitive Swimmers – State Champs). They will not live in a world as we have – the “Business As Usual” is done.

So, my Home / Museum was a 2 by 4 stick built 1979 home which used 1095 Therms and 8000 + KWH per year. It did not power the cars with surplus electrons or ship surplus ones to the grid for my neighbors to share.

Now, the Home / Museum uses 51 Annual Therms (Soon to be Zero) … Powers 2 plug in cars … grows oranges (3 kinds), kumquats, lemons, Aloe Vera, Bananas, …and the former lawn grows grapes, veggies, fruits…. lots. The house ships 6000 to 8000 KWH / yr back to the grid as surplus … and is comfortable.

Oh, and did I mention: It is at 5900 ft elevation in Northern Colorado… where temps reach minus 22 – 24 on severe winter nights… and I do not burn anything else (like firewood).

As an Eagle Scout, I learned (over 50 years ago) the Motto: “Be Prepared”.

I was also trained as a Physicist.. and I have just been practicing applied

Physics… and a little carpentry.

If you have done your home work …and your real work … you can sit back and sing Kumbaya … and pray that some stupid politician does not want to start more Wars for Oil … Wars for Ego … Wars for stupidity…. and shut down Family Planning Centers…. while sipping Tea.

My ancestors were involved in the original Tea Party in Boston Harbour.
They stood for getting a society right with sanity and compassion.

We have the ability to live lifestyles which are Energy Positive / Carbon Negative / Comfortable / Friendly …. but we need to get rid of the Vested Interests…. which undercut the necessary progress.

.

• Fred Magyar says:

We have the ability to live lifestyles which are Energy Positive / Carbon Negative / Comfortable / Friendly …. but we need to get rid of the Vested Interests…. which undercut the necessary progress.

Thanks for your comment Steve and I do agree, the only question is how?

Perhaps we could all listen to Dr. Nate Hagens, even though he doesn’t claim to have any answers either… still he has started down a path to change.

“The Converging Economic and Environmental Crisis” 10 July 2014

• Doug Leighton says:

Fred,

“Thanks for your comment Steve and I do agree, the only question is how?”

I think it`s pretty obvious: Change human nature. But then: “I can calculate the motion of heavenly bodies but not the madness of people.” ― Isaac Newton

• Futilitist says:

Hi Doug.

You correctly point out the problem.

Individual positive change is laudable and inspiring. It would seem to show the way. But, unfortunately, it doesn’t.

1) Basic human nature is not going to change. Not enough people will try to change their lifestyles.

2) Not many can afford to radically change their lifestyles. Alternatives may get somewhat cheaper, but they will never be free.

3) There aren’t enough resources available on the planet for everyone to change their lifestyles anyway. There are over 7 billion human monkeys on the planet right now. There is already not enough to go around.

4) There is not enough time left for enough of us to change our lifestyles to make any difference in the long run. We are about to experience collapse.

• Dennis Coyne says:

Hi Doug,

When prices rise for fossil fuels rise, there will be no change in human nature needed. Also we have a tendency to imitate others so that the more people that buy PV, EVs, passive solar homes, etc the more momentum is gained moving things in the right direction.

• Futilitist says:

Hi Dennis.

You answered number one. Now the rest please.

(I know you are busy, no rush, but do get back to this when you can. Thanks)

1) Basic human nature is not going to change. Not enough people will try to change their lifestyles.

2) Not many can afford to radically change their lifestyles. Alternatives may get somewhat cheaper, but they will never be free.

3) There aren’t enough resources available on the planet for everyone to change their lifestyles anyway. There are over 7 billion human monkeys on the planet right now. There is already not enough to go around.

4) There is not enough time left for enough of us to change our lifestyles to make any difference in the long run. We are about to experience collapse.

• Dennis Coyne says:

Hi Futilitist,

For number 2, they don’t have to be free, just cheaper than using fossil fuels, already true for Wind, will become true for solar and EV as fossil fuel prices rise.

There are enough resources to replace existing cars with EVs, public transit, bicycles, and walking, less resources will be used for extracting fossil fuels and more will be used to build, wind, solar, geothermal, and nuclear power, existing buildings can be improved, made more air tight, better insulation and windows, and new buildings can be built better (more passive solar and natural lighting during the day). As some resources such as copper become constrained, prices will rise and more will be recycled.

For number 4 I don’t think you or I know when the collapse will begin, so we may as well get started, maybe collapse can be averted or mitigated by actions to make society more resilient.

Thinks will need to change, people will be forced by circumstance to make do with less. Such a transition will not be easy and may not even be possible, but it is not clear that there is a viable alternative to trying our best to improve things to the best of our ability.

• Caelan MacIntyre says:

KISS. Nuclear power isn’t simple, either, Dennis.

• Dennis Coyne says:

Hi Caelan.

I agree that nuclear is not simple or easy, developing pebble bed reactors that will shut down safely without the need for cooling would likely be best, if new nuclear is built.

This would always be my last choice if widely dispersed wind, solar, geothermal, demand management, peak power pricing, and energy efficiency are not enough to keep the led lights on.

• Caelan MacIntyre says:

Hi Dennis,
As long as we understand that the whole point behind technology is about the improvement of human lives.
It is also, therefore, about its fully-democratic control.
Both these issues are about ethics/morality– improving human lives and fully-democratic control.
Unfortunately, the problem with increasing complexity is decreasing control over it. This is in part why I am big on simplicity, and ‘infinitely-small’ on government and nuclear power, since both, out-of-control, can spell collapse and what comes with it– death, disease, desolation and despair, etc..

• Dennis Coyne says:

Hi Caelan,

In a world with perfect people, anarchy would be ideal. We do not live in that world.
We do not have perfect governments, I think representative democracy is the best that we are likely to do. Infinitely small government points to anarchy of course.
Let’s say that is not exactly what you have in mind, but maybe 500 to 5000 people per governing unit. However these simple societies are organized, if there is no interaction (trade or war) between units, then society would be very simple indeed. Essentially there would be no technology, and lots of hard manual labor. This may sound ideal to you, I wonder how quickly it would devolve into warring tribes trying to steal land and resources from each other. My guess is about 12 months or less.

• Nick G says:

There’s no significant genetic difference between Steve Stevens, Wimbi (and many other role models) and the rest of us.

There’s no change needed of human nature – it’s culture and social institutions that need to change. That takes longer than individual change – that’s the problem. OTOH, social change can seem slow, and then we can see sudden, non-linear changes.

What plantation owner in Georgia, 1855, could imagine that all slaves would be freed in 10 years??

• lezurk says:

The abolition of slavery is a pretty bad example of sudden social change. Reconstruction was ended much too early by a corrupt political deal. The rise of groups such as the Ku Klux Klan effectively eliminated freedoms of African Americans. Separate but equal became the norm in the south and many other parts of the country. Jim Crow eliminated political rights for African Americans with tactics such as poll taxes and literacy tests for voting. Lynching was commonplace in the south for many years. By the 1960’s African Americans were still second class citizens. But the Civil Rights and Voting rights laws in the mid 60’s changed all that didn’t it? Only Pollyannaish fool would believe that. There is still a powerful political force to disenfranchise African Americans, a new Jim Crow, as one commentator has called it. Look at our prison populations. Just look at the present events of Ferguson Missouri. History is filled with examples of societies being persistent in holding irrational beliefs in the face of reality – even if it has disastrous consequences. You think a redneck is going to give up his big 4×4 pickup for a Prius without a fight? You think this redneck isn’t going to vote for the person who promises the American dream is unnegotiable? Just look at the election results. It is irrational, but hey, that’s the way us humans work. See “Spirit In The Gene” by Reg Morrison.

• Dennis Coyne says:

Hi lezurk,

Progress has been made, more is needed. If you believe that no progress has been made in the rights of African Americans since 1855, I would disagree.

As far as rednecks and their large pickup trucks, high gas prices may change their behavior, that is their choice. If you believe that gasoline prices will remain low for many years, I think that you are incorrect. Gasoline prices will be back to \$4/gallon or more by 2018, the only thing that will bring them down after peak oil has arrived is a severe recession or depression.

• Bob Nickson says:

Net energy productive buildings are a real thing and can be built and operated with a lower total cost of ownership than the current standard. They can look normal.

Three things need to happen:

1. Awareness: owners need to know that NE+ homes exist, and can save them money, so they can demand them.

2. Regulation: energy codes upgrades need to be implemented and phased in over time.

In the International Residential Code, section N1102.4.2.2 allows visual inspection of the thermal envelope for insulation and air-tightness. If this were eliminated and blower door tests per N1102.4.2.1 were made mandatory, the impact would be immediate and profound. I’m a little baffled how one would actually make a visual inspection for air tightness.

Appraisal guidelines need to be updated to value building efficiency. (this may be happening)

Banking guidelines need to be updated to provide extra mortgage funds for efficient buildings. (this also may be happening)

3. Education: Contractors and trades-persons need to be taught how to build for energy efficiency. In my experience, this is a large hurdle. People are not particularly receptive to being told that the way they have always done things is inadequate or wrong, and they are very much not receptive to anything that will slow them down. Appraisers need to be taught to value efficiency. Estate agents need to be taught how to sell it.

Sufficient traction with item 1 can help drive the others.

• Fred Magyar says:

3. Education: Contractors and trades-persons need to be taught how to build for energy efficiency. In my experience, this is a large hurdle. People are not particularly receptive to being told that the way they have always done things is inadequate or wrong, and they are very much not receptive to anything that will slow them down.

I love this guy’s take no prisoners approach…
Distinguished Lecturer Series: Building Science – Adventures in Building Science

• Bob Nickson says:

Thanks for that Fred.

Excellent video. buildingscience.com is a fantastic resource.

Laughed out loud at “They are statistically identical. If there are any architects present, that means that there is no difference.”

and also “The good news is that you get the same [LEED] points for the bike rack.” (as increasing the ventilation).

The semi-combative Q&A at the end was also awesome. (People being not particularly receptive to being told that the way they have always done things is inadequate or wrong.)

No punches pulled was an accurate description.

• Dennis Coyne says:

Hi Fred,

I guess one person at a time. Others may see what people like Wimbi and Steve Stevens are doing and be inspired. Also oil, natural gas, and coal prices will be increasing as these fuels peak and decline and there will be more financial incentive to make these positive changes. Won’t be easy, may not be possible, but worth giving a shot imo.

• Allan H says:

Thanks for the post Steve, you are an excellent example of taking the road less traveled. Your view and actions show that we can all start ignoring this red queen oil conundrum and move away from the life sucking and energy squandering lifestyle. Good for you, best of luck to you and yours as this predicament unfolds.

• wimbi says:

Wow Steve- you are way holier than me, and I thought that around here at least, I was holier than thou.

We are doing all that stuff, but less. I ship only about 4000 kW-hrs back to the grid/yr. And I do burn firewood. How do you avoid that at those temps? More cats?

Anyhow, great to see all these seeds for the right future sprouting here and there in the vast wasteland of BAU. We all oughta get together to shout out the good news to the multitudes.

• Ronald Walter says:

To Steve Stevens:

Do you have an earthship?

• Futilitist says:

I wish I had a starship.

• Dennis Coyne says:

Hi Futilitist,

You should work on the warp drive first.

• Futilitist says:

Hi Dennis,

Good idea! Can I borrow the warp drive schematics you posted in your Oil Shock Model Dispersive Discovery Simplified paper? 😉

• Dennis Coyne says:

Hi Futilitist,

If you find that in there, go for it! 🙂

• Futilitist says:

I’ll sure give it a try, Dennis. But I might need a universal translator since your paper is written in Klingon. 😉

• ezrydermike says:

Steve, Fred, Caelan, wimbi, et. al.

came across this place…

“In 1996, attracted to the low cost of land and the lenient zoning restrictions, a group of young Stanford graduates raised money from friends and family and headed to northeastern Missouri to set up what is now known as Dancing Rabbit Ecovillage, a successful intentional community and 270-acre community land trust. Their idea was to “move beyond protesting ecological destruction towards finding a positive alternative for ecological living.” Sound familiar?

Almost 20 years later, Dancing Rabbit (DR) is a fully functioning ecovillage with around 60 full-time members who live happily on just 10% of the resources the average American consumes.”

http://transitionus.org/blog/dancing-rabbit-ecovillage-living-abundantly-10

• ezrydermike says:
• That dancing rabbit deal sure sounds like an excellent business idea. They get visitors, have their own hotel and ask for donations. I bet they also sell home made crafts, t shirts, and coffee mugs made in Myanmar with the Dancing Rabbitt logo. It’s a wide spectrum money vacuum cleaner.

• Caelan MacIntyre says:

I thought about that one from that angle too, when I noticed how unusually-nice, well-set-up and suspiciously ‘resort-looking’ a particular so-called ecovillage was and how they were looking for free labor in the form of WOOFers. In fact, I was & still am thinking of writing a short article about that for the Permaculture Research Institute’s site. Maybe we can co-write it.

• ezrydermike says:

Well, I have to admit Caelan, I don’t understand your comment at all. So, I hope I can read your article soon.

• Dennis Coyne says:

Hi Fred,

Yes it is scary, but note that this is a fairly pessimistic URR, Laherrere also has estimates of as much as 3100 Gb for C+C based on HL estimates and the USGS thinks 3500 Gb is the best estimate for World C+C. I think 2700 Gb is too low and 3500 Gb is too high and 3100 Gb is about right.

On your population estimates, the UN has several different scenarios for population, you are correct that the medium scenario predicts 8.5 B in 2030, the low scenario would be 8.3 B in 2050 with population falling to 6.8 B in 2100. If the total fertility ratio continues to fall as it has since 1965, then the low fertility scenario seems possible, but the medium variant is probably the best guess.

• sam Taylor says:

Dennis,

Thanks, so presumably the xh oil makes little difference because it’s so hard to extract at any great rare.

I agree with you about the length of the current plateau defining how steep the drop off is, that’s basically ugo bardi’s Seneca cliff effect.

At what point do the assumptions underlying the model break down? I recall Dennis meadows saying something about limits to growth being invalid after the first major peak event, do you think something similar is true here?

• Futilitist says:

Dennis Meadows is correct that predictive models for civilization are invalid after key resources peak. That is because all of the relationships within the model change. At that point, we need a new model that takes into account these changes.

If we really want to know how things are likely to unfold, we should be trying to model collapse, not stability.

We should try to build a realistic world model that crashes. Then we should see if we can tweek the model to not collapse by trying proposed solutions. That is exactly what Dennis Meadows did. He found some possible solutions that were then ignored. That is how we got here.

Of course, I don’t really think we can build such a model because Dennis Meadow’s model clearly showed that it is already too late. We are already collapsing. Any model that is already collapsing will be much harder (impossible) to stabilize.

I think we are stuck in a loop of denial, running around in circles while collapse closes in.

• Sam Taylor says:

I doubt that you could really build a useful model of the actual collapse process. It would likely be chaotic, and extremely sensitive to initial conditions, hysterisis and small changes in assumptions, what with being a nonlinear event and all. I’d argue that building resilience is probably more useful than trying to figure out exactly how collapse will play out. Sometimes adopting the brace position before you crash is the best you can do.

• Right, you can’t model chaos.

• Futilitist says:

I was joking.

• Watcher says:

I can.

And I’ll be right.

Sometimes.

• Dennis Coyne says:

Hi Sam,

I think the basic assumptions underlying the model are robust. In the comments below I present a scenario where extraction rates fall by more than half from 2025 to 2050, this causes a steeper decline from 2025 to 2050. It is doubtful that extraction rates would fall below 3%, unless there is total collapse or adequate substitutes are ramped up to a level where demand for oil is low. Extraction rates can be decreased to any level which people think is reasonable, obviously if the extraction rate falls to zero, there will be no oil output. Though in this model extra heavy oil is done separately and the extraction rate applies to C+C less extra heavy oil only.

• Futilitist says:

Hi Dennis.

“I think the basic assumptions underlying the model are robust.”

I think the basic assumptions underlying the ‘model’ are circular!!!

“It is doubtful that extraction rates would fall below 3%, unless there is total collapse…”

Your ‘model’ fails to account for even the possibility of collapse. You need us to avoid collapse for your ‘model’ to work, so you just assume that collapse won’t ever happen! Nice.

And clearly URR is a dependent variable. You just assume (pick your favorite) URR and model backwards. That is an obvious example of a circular dependency loop.

So basically your ‘model’ allows you to forecast your favorite future and justify it by hiding behind a dense facade of massively unsimplified dispersive discovery gobbledygook. Pseudoscience.

Your ‘model’ isn’t a model of anything. And it is obvious.

• Javier says:

I agree. The major assumption behind the model is that you still have a functioning global economy. At some point after the peak, that assumption is unlikely to remain true.

• Javier: it depends in how much it costs to fill the gap. If our “solar” friends are right then the cost of solar power and batteries will be peanuts. This will allow the gap to be filled in with electricity powered gizmos.

I was reading a nearly religious article by a guy called McKibben at The Guardian who sounded like a muezzin calling his followers to prayer. I don’t think he makes sense, but I sure hope I’m wrong. Maybe that skunk works fusion engine will work…..But they do need to make it work in a hurry.

• Dennis Coyne says:

Hi Fernando,

It is not just solar, it would be a combination of many types of non-fossil fuel energy, at whatever is the lowest cost (when all externalities are accounted for.)

The “solar only” meme is a straw man.

• Dennis, I do read a ton about solar propaganda, for some reason there´s a lot less about wind, and there seems to be a hostile attitude towards hydro in the green quarter.

Unfortunately, when one looks at this topic, it´s important to keep in mind the large third world regions. Africa, Latin America, India, and SE Asia. And the story in those regions just isn´t that easy to tell. For example, here´s a reference to wind power potential in Africa (it´s a map I took from a stufy by KTH Industrial Engineering and Management):

http://21stcenturysocialcritic.blogspot.com.es/p/africa-wind-power-energy-assessment.html

It shows wind power will be difficult to implement, although there will be small niches the map doesn´t show.
Solar power may be in theory an answer, but south of the sahel it can get really cloudy, and we have the battery problem all over again. Geothermal is only feasible in a few areas. Which leaves some hydropower and nuclear to satisfy the needs of 600 million urban dwellers.

Unless we figure out something that population size is going to shrink, they will try to build nuclear plants, and many of them will try to survive in the countryside planting crops for biofuels.

• Dennis Coyne says:

Hi Fernando,

I imagine these problems will be solved as a variety of alternatives are used in the developed World, then the technology will be transferred to less developed areas. If you think that most people think that solar is the only energy source (besides fossil fuels) that should be used, then I am not a part of that group. Solar is useful, but should be used primarily where the insolation is good, wind can complement solar well at high latitudes and a HVDC grid can move energy around within the system.

• ezrydermike says:
• ezrydermike says:

I find it hard to believe you haven’t heard of Bill McKibben.

“I was reading a nearly religious article by a guy called McKibben at The Guardian who sounded like a muezzin calling his followers to prayer.” This seems like an intentional attempt to cause discord.
http://en.wikipedia.org/wiki/Bill_McKibben

• Never heard of Bill McKibben until I read that article. He sure sounded like he was on the tower calling his loyal followers to start some sort of revolt. I bet he´s making money hand over fist somehow.

• Nick G says:

And, of course, bringing in solar is a distraction when we’re talking about Peak Oil. Solar will help replace coal and gas, but it’s not needed to replace oil. We already have EVs which are cheaper than ICE vehicles.

Solar does help with PO, it’s true. Roughly 10% of oil consumption is for generating power, and solar is displacing that pretty quickly. In fact, that’s a big part of solar’s fast growth: it’s cheaper and better for places like Japan, Australia and Hawaii.

• Sam Taylor says:

Solar in Japan seems to be reaching the point where the grid can’t cope with a great deal more without the risk of breakdowns, and it’s growth looks to perhaps be slowing: http://www.nytimes.com/2015/03/04/business/international/japans-solar-power-growth-falters-as-utilities-balk.html?_r=0

Large scale solar integration into the grid is far from a solved problem when it comes to issues of load balancing and frequency stability, and current grid archetecture is likely unsuited to it. This is only exacerbated in somewhere like Japan, which can’t export to other countries to get rid of surpluses, unlike Germany.

• Nick G says:

Utilities don’t like competition from customer-based solar. Who would have thought?

• sam Taylor says:

Or, you know, the technology isn’t fit for purpose.

• The Japanese are running against the solar technical limits. But I see the physical reality doesn’t sink in.

• Nick G says:

Nah. Japan’s contribution from solar was 1.3% in 2013. You’ve acknowledged that solar can do far more than that.

Solar’s economic limits are somewhere around 30%. Technically it could provide 100% of what we need but no one is suggesting that, as it would be badly sub-optimal.

• Nick, your answer is identical to my sister in law´s: “hell, we just use electric power, and charge them from the electric outlet in the garage”.

• Nick G says:

And how, exactly, is she wrong? Charging an EV in your garage is much cheaper than putting gas (or diesel) in your ICE car.

• Synapsid says:

Fernando,

Bill McKibben founded 350. org, the group that managed to get the whole of the MSM to focus only on STOP KEYSTONE XL!

• So that´s the guy working for the Venezuelans? I get it.

• Synapsid says:

You get it, but he doesn’t. Lenin would have called him a useful idiot.

• wharf rat says:

“Lenin would have called him a useful idiot.”

Arrhenius would have called you a useless one.

• Dennis Coyne says:

Hi Javier,

Absolutely correct. If we assume there is collapse as a result of peak fossil fuel, then decline will be very steep. If we assume fossil fuel prices increase and people begin to substitute other forms of transportation (EVs, public transport, biking, and walking) and move to more walkable environments, and that alternatives such as wind, solar, geothermal, hydro, and nuclear are ramped up in response to high fossil fuel prices, then collapse might be averted. All of these also help with climate change. If the alternatives become cheap enough, much of the fossil fuel resources could be left in the ground.

Think back to 1985, did many of us think we would have hand held computers (aka smartphones) 30 years in the future? I got my first personal computer in 1987 and didn’t start using the internet at home until 1996 (with a 56 kb modem). It is hard to predict future technological change, but it has changed over the past 30 years much more than I thought it would “realistically” in 1985. In fact if someone told me about the technological advances that would be made in 30 years back in 1985 I would have told them they watched too much Star Trek.

• Scotty says:

Ye cannae change the laws of physics, Captain Coyne!

• Nick G says:

The Limits to Growth scenarios were designed not to prove that there were limits to growth. Instead, they were designed to show the behavior of a system that contained limits (overshoot). The limits were assumed by the model.

I would agree that the LTG model was useful – it showed what overshoot looked like, and showed that overshoot was possible in a model of limited resources.

It did not demonstrate that it was a model of the real world. The model was extremely simple. For instance, resources were unitary: they weren’t broken down into minerals, energy, or anything like that: just “resources”. There wasn’t an explicit recognition of renewable energy – wind, solar, etc. The only “renewable” resource was food and biomass. That’s a mighty simple model.

This simplicity, and the lack of substitutability of non-limited resources for limited resources made the model very, very far from anything that might be expected to model the real world. As the authors said repeatedly, these were scenarios, not forecasts. It was treated as such by the economics community, much to the puzzlement of environmentalists who didn’t understand just how limited the model was.

• Sam Taylor says:

And yet the standard run has proved to be a remarkably accurate prognosticator, for such a simply model.

http://sustainable.unimelb.edu.au/sites/default/files/docs/MSSI-ResearchPaper-4_Turner_2014.pdf

Of course, there were also other runs which followed the “Nick World”, in which energy was bountiful, and these too resulted in collapse. It’s slightly more complex under the hood than you give it credit for, I think.

• Dennis Coyne says:

Hi Sam,

Did the model anticipate the decline in total fertility that has occurred over the last 50 years, it may be that the model overestimated population growth, it may also have assumed no recycling, no improvements in agricultural productivity, a simple model can miss many details. Also the high energy availability might have been fossil fuels which cause pollution, wind, and solar are relatively less polluting.

There is a lot of room between total collapse and infinite growth, in fact as population peaks and declines growth can stop or even decrease while maintaining real GDP/Capita. We can survive on much lower GDP/capita so that if this falls worldwide, it does not necessarily imply collapse, it depends on the rate of decrease.

Median income per adult in Russia is about 1/3 of the US level so if the median income of the wealthy countries fall and income is redistributed through taxation, there would be relatively little pain in those countries. The rest of the world could maintain median income levels until their population peaks and declines (as total fertility ratio falls as access to birth control and women’s education and rights improve). There are a lot of things that could potentially happen in response to fossil fuel scarcity and a transition to alternative energy sources.

Or we could keep it simple and assume that the worst scenario is the most likely one. I agree that there are limits to growth, reducing population growth and transitioning to alternative energy are the keys to avoiding collapse.

• Sam Taylor says:

Dennis,

The chart on page 8 of the page that I linked to shows the rough population estimates of the ltg model vs reality. They track one another very closely, so I think we can call that a win for ltg. Globally population growth is still very much happening. I seem to recall that there were ltg runs which had very large scale recycling and switches to renewable energy sources, which still ended in collapse.

Transitioning to a largely renewable based energy structure , if that is indeed possible without collapsing our society, would be a good step, but it would only serve to amerliorate climate change, not any of the other problems associated with our tremendous energy use such as deforestation, desertification, overfishing, freshwater shortages, and the fact that we’ve put both planetary nitrogen and phosphorous cycles completely out of whack (more than 50% of the nitrogen in your body was fixed via the haber bosch process). Growth and more things got us into this mess. More of other things (solar panels and wind farms) is just the same thinking.

I went to a talk at the Royal Institution last night on the anthropocene, and while it was very interesting, it was also quite horrifying to see the true scale of just how incredibly we’ve managed to despoil the planet in less than a century. I hope I’m wrong, but I suspect any chance of a smooth landing went out of the window many years ago.

• Lloyd says:

Did the model anticipate the decline in total fertility that has occurred over the last 50 years,

Yes it did. There’s a graph in this article from the Guardian showing the birthrates matching the standard run pretty accurately. (http://www.theguardian.com/commentisfree/2014/sep/02/limits-to-growth-was-right-new-research-shows-were-nearing-collapse)

it may also have assumed no recycling, no improvements in agricultural productivity, a simple model can miss many details.

The 30 year update looked at 10 scenarios, some of which looked at reducing population and ecological footprint,Scenario 9 for instance:
“Scenario 9: World Seeks Stable Population and Stable Industrial Output per Person, and Adds Pollution, Resource and Agricultural Technologies from 2002. Moving in this direction, in another scenario the world seeks stable population and stable industrial output per person, and adds pollution, resource and agricultural technologies starting in 2002.

In this scenario, population and industrial output are limited as in the previous run, and in addition technologies are added to abate pollution, conserve resources, increase land yield, and protect agri- cultural land. The resulting society is sustainable: Nearly eight billion people live with high human welfare and a continuously declining ecological footprint.

None of these things happen in the BAU model, which is what is being followed pretty accurately, and which suggests that things end badly around 2030. There was a video linked here a while ago (https://youtu.be/f2oyU0RusiA) of Dennis Meadows giving a talk at the Smithsonian where he explains why it’s too late for sustainable development.

-Lloyd

• Dennis Coyne says:

Hi Lloyd,

I have not looked at the standard model, but stable population is an incorrect assumption, there is no reason to assume that TFR can go no lower than 2.1, many countries are already much lower than this level, the World level fell from 5 to 2.5 in 40 years. So collapse will indeed happen with stable population, if the World follows the UN’s low fertility scenario, TFR falls to 1.5 by 2100. In a wider are below I will post a chart with a UN scenario to 2300.

• Dennis Coyne says:

Hi Lloyd,

I agree that things will be bad, but things may change rather quickly once it is realized by the mainstream that there are limits to growth, that peak fossil fuels are real, and that anthropogenic climate change is a problem.

You may be old enough to remember that cigarette companies convinced people that smoking was good for them, for many years in the face of overwhelming scientific evidence to the contrary. The merchants of doubt still work in the climate change skeptic movement.

Not a lot of people take seriously the claim that smoking cigarettes is not bad for your health, in the future similar claims that fossil fuel carbon emissions are “good for the planet”, will be considered silly.

• Lloyd says:

Hi Dennis.
My point was that the standard model reflected actual population increases, and by extension fertility rates, very closely. Even if there is a decline in fertility in the next 15 years, it won’t have any effect. The population changes that lead to decline after 2030 are baked in at this point.

-Lloyd

• Nick G says:

the standard run has proved to be a remarkably accurate prognosticator, for such a simply model.

No, it hasn’t. The key question: is it any better than “BAU” forecasts? No, because the LTG forecast *is* BAU until limits are reached.

In fact, the three measures charted on page 8 don’t match any better than any other studies. Most importantly, their errors are the opposite of what you’d expect: death rates are lower, and birth rates are lower.

Most importantly, there is still no treatment of non-oil transportation, or non-fossil fuel energy. This means that the “resource” charts are meaningless.

These are basic flaws: until they’re included, the model isn’t even wrong: it’s just irrelevant.

there were also other runs…in which energy was bountiful, and these too resulted in collapse.

No. First, “Energy” is not a component of the model. They just have a generic “resources”. That’s how simplistic this model is.

2nd, energy was *not* bountiful in the “high resource” run. It was doubled, but still a limited, depleting resource. That’s not bountiful. Solar and wind energy are non-depleting, and they can be scaled 100x as large as current human energy consumption.

• not clever says:

“Solar and wind energy are non-depleting, and they can be scaled 100x as large as current human energy consumption.”

I’m pretty sure I don’t want to live on that planet…

2. Thanks Dennis and Ron for posting this piece 🙂

3. Ronald Walter says:

2.7 trillion barrels of proved reserves, 1.25 trillion already mined and consumed, 1.45 trillion barrels remaining that are recoverable.

85 000 000 bpd consumption, it appears the world can consume only so much, too much oil available for market creates an oil price crisis, one more crisis to add to all of the other crises.

365 times 85 000 000 equals 31 025 000 000 barrels of oil produced each year reaching the market.

1.45/.031025=46.74 years of recoverable oil remaining. The extraction rate will be 2.2 percent, 1450 billion barrels times .022 equals 31.9 billion, close to the annual consumption rate in 2015. I know it is simple math, but it illustrates what is happening.

2015 plus 47 equals 2062, if the population increases to 9 billion, the time frame will shorten and you will need to subtract another 15 years or 2047 when there is more dependence on coal and renewables, hydro, geo, nuclear, and the world will begin to do without as much oil, the bits and pieces of oil left on the taco plate will be what’s available.

If the first 1.25 trillion increased the CO2 in the atmosphere by some 50 ppm, add in 60 ppm for coal burning, the 280 ppm CO2 present in the atmosphere in 1800, 295 ppm is the 1895 standard, then the total CO2 is at 390 ppm present in the atmosphere with maybe another 15 ppm or at 405 ppm.

Add in another 120 ppm for the next 32 to 47 years of burning oil and coal, the total CO2 emissions from man burning fossil fuels will total 230 to 245 ppm by 2047, with maybe a lag time, add the 15 years, 525 ppm in 2062, 295 ppm CO2 plus 230 ppm CO2 emissions from man’s activity.

• I prepared a more optimistic scenario and I got a peak CO2 concentration of 630 ppm. But it’s a rough figure. To refine it one has to get into cement plant, methane, petrochemicals, asphalt, and so on. Thus far I seem to have the highest estimate by somebody who uses reserves rather than a cornucopian model.

• Allan H says:

Of course the temperatures caused by the current 400 ppm are decades away due to lag time in the system. And then there are the dire warnings of paleontological data as explained in this article by Joe Romm . http://thinkprogress.org/climate/2011/01/13/207334/science-kiehl-ncar-paleoclimate-lessons-from-earths-hot-past/

Calculations of the effect of CO2 are woefully inadequate to determine future temperatures on this planet. They ignore natural methane discharges, huge albedo changes and the fact that CO2 is already energy saturated thus it’s additional greenhouse effects are due to band broadening. Also oftentimes ignored is the role of that other gorilla in the room, H2O, a strong greenhouse gas. Of all of them, CO2 is the smallest effect, it is merely the trigger to other forcings.
We can model changes in albedo, methane discharges, residence times, exudation of CO2 from dying rain forests and desertification. But why bother when the paleontological data already tells us what happens when the whole series of greenhouse and heating effects are put into play? It is generally a waste of time to wonder how bad things will get. Sort of like wondering whether the cliff you are dropping over is 100 feet high or 3oo feet high.
We do not even have a good handle on when the plume of pollution that is causing global dimming will end, and that is totally in our control. Better to try to slow things down as much as possible. Who knows, maybe some people will come up with some really bright and practical ideas to reverse effects without causing more havoc. Now that would be new and refreshing.
Humanity may have pushed the boulder over the edge with the fossil fuel age, but nature will create the avalanche.

• nNgass says:

Methane CH4 is emitted by natural sources such as wetlands, as well as human activities such as leakage from natural gas systems and the raising of livestock. Millions of acres of permafrost of the Canadian and Russian north are melting and millions of tons of CH4 will released. Pound for pound, the comparative impact of CH4 on climate change is over 20 times greater than CO2 over a 100-year period. Whether we curb CO2 at 200ppm, 400ppm, or 600ppm will only have a minor impact to the overall global system.

4. Johnny says:

Considering that bell shaped curvy things have pretty much been discredited during the recent “increasing oil production faster than at any time in its history” in the original example of “bell shaped curvy things work” region, why are we assuming that the world can’t do the exact same thing?

Was this method benchmarked against the US to make sure it can accommodate the new, non-bell shaped curvy aggregate oil production profiles?

• Jeffrey J. Brown says:

It appears that most tight/shale plays are gas prone, and in any case not all tight/shale plays are commercially productive, e.g., the Monterey Shale.

Where we have commercial oil production in the US, e.g., the Bakken Play, the average oil production rate is a little over 100 bpd, with a median production rate of less than 100 bpd. It remains to be seen if rapidly declining wells like this will be commercially feasible in many areas of the world.

In areas where tight/shale plays may be commercially feasible outside the US and Canada, the key question is whether operators in a given play can drill and complete wells fast enough to offset the declines from existing tight/shale wells and add new production.

Early last year, it looks like US rigs accounted for about half of the total global rig count, which gives one an idea of the scale of the drilling and completion effort that it would take to replace the output from giant declining global oil and gas fields with the output from high decline rate tight/shale plays.

It’s interesting to look at some regional declines in US oil and gas production, e.g., marketed Louisiana natural gas production (the EIA doesn’t have dry processed data by state).

According to the EIA, the observed simple percentage decline in Louisiana’s annual natural gas production from 2012 to 2013 was 20%. This would be the net change in production, after new wells were added. The gross decline rate (from existing wells in 2012) would be even higher. This puts a recent Citi Research estimate in perspective.

Citi estimates that the gross underlying decline rate for overall US natural gas production is about 24%/year. This would be the estimated year over year decline in production if no new wells were put on line.

Based on the Citi report, the US would have to replace 100% of current natural gas production in about four years, just to maintain current gas production for four years*.

*Of course existing production would not decline by about 100% in four years at a 24%/year decline rate, but I am stipulating a “What if” steady state production scenario.

• Watcher says:

Powerful stuff Jeff, but 4 yrs of 24% decline is not almost 100%. Exponentials in decline are not like exponentials in growth.

Start at 100, reduce 24% and you have 76. Reduce 24% the following year and you have 58. Reduce 24% and 44 and then the fourth year you have 33. So a 24% decline rate means you have to replace 66% of production every 4 yrs.

• Jeffrey J. Brown says:

You might re-read what I wrote.

If overall production declines at 24% per year and continues to decline at 24% per year as we add new high decline rate production, and if we successfully maintained production, we would need to put online 24% + 24% +24% + 24%, because we are declining against a fixed production level, NOT a declining production level.

• BC says:

Yes, the 24% production decline is an exponential (log-linear) order of decline of ~50 months and a compounding halving of decline of ~35 months.

To maintain the production level, we would need to double proven, recoverable reserves every 3-4 years but at a profitable energy cost of energy extraction that also permits growth of real GDP per capita in order for consumption per capita and to GDP to justify the necessary investment required to extract per capita.

However, as I have previously shared, since 2012 we have consumed 65-80% of additional US domestic “uneconomic” extraction in order to extract at a super-exponential (unsustainable bubble) growth rate of extraction at a price of \$75-\$100/bbl that the US economy cannot afford in order to sustain growth in real terms per capita, and at a price today at \$45-\$50 that is no longer profitable.

The implication is that US domestic oil extraction will eventually crash to 5-6Mbd from 9Mbd, whereas oil consumption will decline proportionally from ~20Mbd to 17-18Mbd by 2017-18 at the level of oil consumption to GDP and at the decline rates Jeffrey notes.

If so, the effect will be larger than that of 2008-11 and match the decline during 1979-86, resulting in a Texas-sized bust in the energy and energy-related transport sectors that will have a disproportionately large effect on US capital and durable goods orders and industrial production, risking recessionary effects beginning at any point hereafter.

• Caelan MacIntyre says:

I enjoy your posts and watched the videos too. They were a good review… So when does this collapse really dig in its heels. I am getting impatient.

• Futilitist says:

Cool your jets, Caelan. Very soon.

April or May, according to the EIA

• I started playing with a spreadsheet, and figured out its possible to build up to 3 million BOPD drilling continuously for 20 years at about 3500 to 4000 wells per year. Once this rate is achieved it can be sustained drilling at the same rate (about 3500 to 4000 wells per year). The question in my mind is whether we can figure out where to drill 70 to 80 thousand wells.

However, I don’t agree drilling these light tight oil wells is a bad deal for the country. The key is to have about 300 mbo per well reserves, and a well cost below 8 million usd.

• Dennis Coyne says:

Hi Fernando,

My understanding is that any oil field has sweet spots and that these are limited in area, as the sweet spots become fully drilled the EUR per well will decrease and operators have to move to marginal areas or stop drilling. Also the Eagle Ford wells are not as productive as the Bakken/Three Forks wells, more like 250 kb for an average EUR. If we drilled 80,000 LTO wells and all wells averaged 300 kb, that would be 24 Gb, if we double the number of wells and assume the second 80,000 wells produce at an average of 200 kb, we get 40 Gb.

In the grand scheme, this is not a lot of oil.

• Dennis:

Exactly. The sweet spots are highly variable. And what makes a sweet spot to be sweet can depend on different parameters. For example, in a giant heavy oil field we would look for warmer zones with excellent sand quality and thickness away from water. This means we don´t go up structure to the top, to be really far from water, nor do we go down near the water contact, but try to find thick sands in the intermediate area, where we are at least 4 km from the water but the reservoir temperature is high enough to drop viscosity to a more attractive value.

I´m not that familiar with the tight rock approach, but my guess is they look for low viscosity, high pressure, some porosity and permeability and as low water saturation as possible. And of course a reasonable thickness. This has to be coupled to well cost (evidently it´s easier to find a low viscosity fluid and high pressures at 12 thousand feet but the well cost starts getting out of hand.

Reference the Eagle Ford, I don´t have much detail in hand, but I assume a large company would be securing acreage in the gas condensate window, and run economics on a 20 year price forecast for both the oil and gas. That may take a well into the economic realm.

However, they can drill the USA like a pincushion, and like you wrote, the overall reserve figure isn´t going to make that much difference. This is more so if we consider those fluids are very light and don´t satisfy the needs of the typical refinery.

• wimbi says:

So doesn’t all that good arithmetic yell at us loud and clear that we had dam well get serious about other energy than ff’s??

And if that is the case, then why don’t I see more talk here about getting off instead of just busting the bank fruitlessly looking for more???

After all, this is a place that discusses the future of oil, and since that future, by all these well thought out numbers, is pretty dim, then the future of oil has gotta be something not oil.

Like, for example, slowing down, powering down. That’s not a decline in lifestyle, its an improvement.

• Caelan MacIntyre says:

Hey Whim Bee,
And beekeeping, and beeswax for, like, candles and maybe sealing things. Beeswax is renewable green bee energy, but so is honey. Honey, aside from its use as a natural sweetener, may also be a mild antiseptic and preservative and used to make mead. Of course bees pollinate and provide food for birds and other wildlife.

“Here’s good advice for practice: go into partnership with nature; she does more than half the work and asks none of the fee.” ~ Martin H. Fischer

• wimbi says:

Good! Half way there already.

The rest of the way with a whale tail windmill, looks just like a whale tail, only a few meters above the ground, flaps up and down when the wind blows, pumps compressed air to a bunch of discarded pipeline segments, compressed air goes over instant response gas turbine to get you thru those cloud months.

• Caelan MacIntyre says:

That sounds intriguing. I am just about to head out, but meant to ask you/pick your brain about something I had mentioned on TOD, (but I’ll wait until later for that), and if you would like to share any images, drawings, napkin sketches, or diagrams of your work that you’ve done, thought of, attempted, and/or that might be online that others have done or attempted. In all cases, they don’t necessarily have to work well or be successful, either, as that is part of R&D of course.
Catch you later!

• Caelan MacIntyre says:

Treehouse-design-in-progress using palette design constraint.
Split-level, all-season, live-in, for adults! (woo-hoo) ‘u^

• Caelan MacIntyre says:

Ok, back…
What I had mentioned on TOD was about a friction heater. I think then the wrong video link got posted, although the still image posted is correct if recalled, but in any case, I had had a desire to heat a small cabin or treehouse without electricity or combustion, and thought about friction (along with passive solar), using a windmill for the mechanical energy source. So I went online to see if anyone had arrived at something of the sort and came upon a Frenette friction heater that used two or more spinning cans or discs with oil in between them.
What do you think? Even if this Frenette contraption doesn’t work, could a relatively-small space be heated with friction from mechanical wind or water energy, and what kind of ideas might you have regarding it, and even if you have attempted anything like it before?

• Caelan MacIntyre says:

Here are that heater’s patent and drawings.

• sunnnv says:

Well, it certainly works to convert mechanical energy into heat – that’s how Joule derived his laws/constant.

http://en.wikipedia.org/wiki/Mechanical_equivalent_of_heat

It might not be 100% efficient, though could be reasonably close. Anybody with hydraulics on a tractor can attest that the pump heats the fluid pretty damn hot.

But electrical resistance heating is 100% efficient, so unless you have some reason for avoiding electricity (which is handy for other things), why do the mechanical thing?

For cheapness and fire safety, I would use plain old water like Joule did, and a rough/crude paddle/barrel to maximize friction.
Though if you wanted hotter (not more heat energy, but hotter fluid), use an oil.
http://www.engineeringtoolbox.com/pumps-temperature-increase-d_313.html
(Note the low temp rise in the example – you are going to need a LOT of mechanical energy to heat a building).

A multi-blade windmill (like the typical water pumping windmill), or a Savonius wind turbine might be a good idea, since a drag-type wind turbine will be somewhat self-regulating (though in-efficient).
http://en.wikipedia.org/wiki/Savonius_wind_turbine

Otherwise, you need to deal with the possibility of over-speed/over-stress of the wind turbine/mechanical linkages.
An idea there would be counter-rotating disks or nested cylinders, as speed increases (within reason), friction increases.

In any case, some careful calculations of the power you will get from a wind turbine in the actual site winds are in order, most small/inefficient wind turbines are not that productive.

Do you get ice?
Ice and wind turbines are not the greatest combination – there are ways of dealing with it, but adds to expense.

A more efficient “lift type” wind turbine, with the pump/heater at the turbine and pumping the heated fluid to the house might be a consideration.

The conversion in the MacOSX calculator say 1 kWh is 2.6 million ft-lbs, or 3,412 BTUs to give you some idea. A wind-pump will put out a few gallons a minute in a decent wind, say from a 50 foot well, that’s 8.34 lbs/gallon * 4 gallons/minutes (guess) * 60 minutes/hour * 50 feet = 100,080 ft-lbs of energy, or about 1/26 of a 1 kWh heater – i.e. not so much heat.
A rough rule of thumb is 500 BTUs/day/square foot of solar hot water collector, so a quarter square foot solar collector has the same _rate_ of energy production as the windmill.

If intending to use such a small scale heat source, super-insulation would seem to be a must, depending on climate.

Also, have you considered solar hot water or solar hot air. One can store a lot of heat in a tank/rock bin. One can have a wood-fired heater, remotely located, as backup.

FYI – lots of interesting things at
http://www.builditsolar.com

• You would do better building a two story house, use the first floor for a barn, fill it with cattle. Feed hay to the cattle. Use the cow patties in a stove. And the animal heat underneath will heat your floor. My great great grandparents lived like that in northern Spain, but they supplemented it with a coal stove.

• Jeffrey: I haven’t seen the referenced Citi analysis. With that caveat, I want to point out that as the tight gas takes a larger fraction of the USA gas production, and the wells mature, the global decline rate should decline, and eventually be less than 10 % per year, as long as the number of wells being drilled per year doesn’t increase appreciably. This is a natural function of the hyperbolic decline performance.

• Jeffrey J. Brown says:

The problem of course is the high percentage of current, and high decline rate, production at a given point in time coming from wells completed within the previous two years.

Also, when modeling hyperbolic declines, I think that there might be something of a survivorship bias, i.e., insufficient weight may be given to the decline in production due to wells being shut-in and then plugged and abandoned before hitting the 10 year mark.

• Watcher says:

The insufficient weight is being given to trucks that don’t go out to pick up any oil from older wells because they aren’t being paid because the lenders demanded all cash go to service the debt repayment.

• Good point. But I wonder if they are really abandoning a significant share of wells before 10 years. The key will be water production tendencies and gas prices. And I guess the price they expect to see in the future.

What will happen when the over hang starts to disappear? Isn’t it sensible to wait and try to produce wells at \$7 per MMBTU? I also expect some wells to repressure. These dual porosity systems can do wonders if shut in for a couple of years.

• Johnny make sure the curves you use are for crude and condensate only. We see many curves with ethanol, NGL, GTL, biodiesel, and Refinery Gain mixed in.

• sunnnv says:

re: “increasing oil production faster…”

So I just went to eia.gov
to their international statistics, and got yearly production of crude + lease condensate.
http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=57&aid=1&cid=ww,&syid=1980&eyid=2013&unit=TBPD

then did a row with ((yearN+1 – yearN) / yearN) to see growth on a world wide basis.
I find that in 1986 oil production grew 4.3%, 2004 was 4.5% – the two fastest growth years in the data.
From 2010 to 2013 (last year of data), the percentage increase in world oil production is:
2010 2.4%
2011 0.1%
2012 1.9%
2013 0.1%

While the data is noisy (economics, etc. mess with the geological factors), the
“increasing oil production faster than at any time in its history” thingy is
_wrong_ on a worldwide basis – which is what ultimately counts.

The “fracking (of light tight oil) will save us all forever” sure looks like a wall street hype bubble.

One can also eyeball this off world oil production charts, like the one on page 9 of
Speaking of wall street bubbles – Art talks about that in the video the slides go to:

• Dennis Coyne says:

Hi Johnny,

The LTO boom in the US will likely amount to between 20 and 50 Gb of oil total URR, for the World the URR is between 2700 and 3500 Gb, we have produced about 1250 Gb of crude plus condensate (C+C) through Dec 2014, so we have between 1450 and 2250 Gb left to be produced (best guess is 1850 Gb imo). The 35 Gb from the shale boom is a relative drop in the bucket. World output of crude plus condensate has only increased from 74 Mb/d in 2005 to 77 Mb/d in 2014 an average increase of 0.44% per year over that 9 year period. I doubt we will increase C+C output by very much, maybe we night get to 79 Mb/d at best, but within 5 years C+C output will be decreasing and possibly sooner.

• Johnny says:

Dennis, the IHS Edin database certainly does not contain only 2700-3500 GB in the P2 category. Certainly no estimate of “to be produced” can be made without an assumption of “yet to be found”, what might that estimate be? The USGS was listing some 500 GB a few years back in their 2012 update to the 2000 World Assessment, and that didn’t include shale resources, that number was put together for the EIA is another 300+ GB or so?

As far as C+C increasing “very much”, according to TOD it wasn’t supposed to increase at ALL back in 2008. Here we all are, 7 years later, and it still might increase? Just not “very much”.

As someone with an interest in models, I am waiting to see how well this particular numeric method works when applied to old producing areas like Texas and the US. If this model cannot account for the reality of modern industry practice and technology, and any other consequences caused by higher prices, then it isn’t a given that it has any value whatsoever when these practices become common across the globe.

• Dennis Coyne says:

Hi Johnny,

URR and 2P reserves are not the same thing.
In 2010 Jean Laherrere estimates that 2P reserves of C+C less extra heavy oil were about 850 Gb.
When comparing to the IHS database, 425 Gb of extra heavy oil reserves need to be deducted and 300 Gb of inflated OPEC reserves, which are not audited.
The USGS estimate is on the high side because they base their reserve growth on US statistics, but the US reports 1P rather than 2P reserves and this gives a falsely large estimate for reserve growth because you need to look at the growth in 2P reserves for the estimate to be meaningful. The USGS yet to find and reserve growth numbers are too optimistic I my view, I expect about 200 Gb of new discoveries and about 400 Gb of reserve growth. These estimates do not include extra heavy oil which I estimate at 500 Gb, this is only half of the USGS estimate, but the long development time for extra heavy oil(XH) resources would lead to very little change in the estimate for XH oil output through 2100 if the URR for XH is 500 Gb or 1000 Gb.

The technology used in the US is used throughout the globe, the major difference is the ownership rights for minerals are different in the US from elsewhere in the World and this is unlikely to change. The model matches output over the 1960 to 2014 period very closely and is able to handle the technological and price changes over that period quite well. Eventually I will present a model using the USGS estimates, but my guess is that it will be too optimistic. I rely on the knowledge of Fernando Leanme and others which suggests the USGS is likely too optimistic.

Finally the EIA estimates are often very bad (see there Monterrey Shale estimate) so I discard their 300 Gb shale oil estimate for the World. Most LTO output will be from the US (maybe 35 to 50 Gb), there might be some output from Russia (no more than 50 Gb). If we get 100 Gb of output from LTO for the World, this is basically a rounding error, it will not help very much.

5. Philip Backus says:

Hello Dennis and all and thanks for a great post. A lot to absorb. After several rereads smoke appears to be coning from my ears so I had best just read what others have to say on the subject. I truly appreciate what you and the other serious researchers here are doing. Best regards, Philip

6. Political Economist says:

Dennis, thanks for the great post. Will read it carefully this evening.

7. coolreit says:

So is peak C+C production now? That’s what figures 1 and 10 look like.

• Dennis Coyne says:

Hi Coolreit,

Whether peak oil is now depends how high extraction rates can go, if they rise faster than I assumed, the peak could be later, but extraction rates cannot keep increasing forever. I would say peak is between now and 2020 with a best guess of 2018. If output rises at all, it will not be by much, I think a plateau between now and 2020 is a possibility, but the longer a plateau is maintained the steeper the decline on the backside.

The short answer yes, if URR is 2700 Gb, the peak may be 2014, I think the URR is 3100 Gb.

8. Andy Hamilton says:

Just out – EIA say US shale oil production increases will grind to a halt in April:

http://www.platts.com/latest-news/oil/london/us-shale-oil-output-growth-grinding-to-a-halt-21113599

”The US shale industry is on the cusp of the inflexion point where legacy declines start to overwhelm new production, the net gain becomes a loss and US shale oil output starts to contract.”

Presumably by May then production will start to fall rather rapidly (and US total production will start to fall). Is this not rather earlier than they were saying just a few months ago?

• Political Economist says:

http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf

Latest EIA Drilling Productivity Report. Oil Production will rise significantly only in Permian in April, to be offset be declines in Bakken and Eagle Ford.

• Yes it is earlier than we expected, giving that there were 3,000 wells awaiting fracking at the end of the year. I, and apparently others, knew fewer wells would be drilled but expected the fracking of wells would not slow down by that much. Apparently we were wrong.

Oil drillers wait for price rebound before tapping new wells

From North Dakota to Texas, more than 3,000 wells have been drilled but not tapped, based on estimates from Wood Mackenzie and RBC Capital Markets. Waiting gives producers such as Apache and EOG Resources a better chance of receiving a higher price. But it could delay a recovery by attracting more supply every time prices rise.

“Effectively, the rock is the storage,” said Troy Cook, an analyst with the Energy Information Administration in Washington. “If you can afford to hang on to it, you could certainly choose to wait until the price goes up.”

• I have to give credit for Rune Likvern for coming up with the Red Queen analogy. But a few months prior to his post at TOD, I was also trying to figure out how the Bakken could keep up its frantic pace.

Take a look at this post of mine from May 2012
http://theoilconundrum.blogspot.com/2012/05/bakken-growth.html

The insight to be gained from this analysis is how precariously positioned on a knife-edge some of these resources are.

• Andy Hamilton says:

But given the rapid fall-off in the production from existing wells, how long can these companies hold wells in limbo? Their cash flow will plunge unless they bring new wells on line. A few months at best for most of the smaller companies I would say. Their bottom line will get wrecked pretty quickly unless they rapidly replace those depleting existing wells pretty sharpish. Ergo I call bullsheet on the claims that companies will sit on their hands ’till prices improve’. Very few of them can afford to, they are on the Red Queen cash generation treadmill…………

• Ron, the economic analysis I did this weekend shows its a better option to sit on a drilled well for as long as three years. This means there will be companies holding back and leaving the wells cased until performing the fracture jobs and hooki g up for production is worth the effort. There are quite a few asumptions built into such a model, but the majority of cases say it’s better to delay the fracture job.

• Mike says:

Fernando, let me see if I’ve got this straight:

You are the CEO of Shale R Us, LLC. Your net income stream has been cut by 65% in the past 5 months because of oil prices. You are looking down the barrels of a 12 gauge shotgun that in 2-3 years, when your junk bonds mature, is going to go off and take your head plumb off at the shoulders. In a few more weeks you are going to have to prepare quarterly reports that shows your booked reserve base has been cut in half and your asset to debt ratio is now 1 and some change to 1. Your name will be plastered all over that report. The guy holding the shotgun that’s pointed at your head has got that thousand yard stare in his eyes already and his hands are shaking. You are not sleeping well at night and starting to drink before noon, like J.R. Your dog no longer greets you when you come home. Things can always get worse, you tell yourself, but it ain’t helping much.

To get yourself out of this mess, you are going to borrow MORE money to drill MORE 3 million dollar wells, to then stack them on the shelf for 3 years waiting on, what you hope, will be a price increase so that you can then frac those wells. So, NO income whatsoever for 3 years to cover all that new borrowed money. Your debt is starting to look like Cushing, OK. And then you discover, darn it, things actually CAN get worse because your revenue from existing production is declining at the rate of 6% per month. Now, your drinking with your cereal in the mornings and the dog has run off entirely.

Who in the world is going to keep loaning Shale R Us money to drill these wells that you don’t want to frac for 3 years? Uh oh, at precisely the same time the price of oil gets to about 70 dollars and its time to frac your inventory, your junk bonds have matured and you cannot borrow enough money to buy a cheeseburger. Those guys that follow you home every night in the black SUV are really pissed now. You are afraid to leave the house.

Respectfully, if I were you, as CEO of Shale R Us, which I am really glad I am not, instead of borrowing more money to drill more wells at this late stage in the game (the 2 minute horn went off 3 minutes ago), I’d park the drilling rigs, take what I have left in the way of production income and deleverage as fast as I can. You are gonna need some friends in high places before it’s all over, I’d guess.

Or, better yet, just move to Tibet and become a monk.

This shale thing is a bad situation, folks. To coin an old S. Texas phrase, es no bueno por ca-ca.

Mike

• Mike, I don’t run full company models including financing issues. I simply line up a single well, its CAPEX and OPEX, and compare well returns for two cases: 1. Drill well, frac, complete, produce. And 2. Drill well, temporarily abandon, wait a period of time, then frac, complete, and produce.

When I compare the PV10 of these two cases the answer is fairly consistent. The delay case is much more attractive if one waits up to three years.

The results are a function of the well performance curve, and the cost split between drilling and casing, and what comes after. I assumed the drill and case cost was \$3 million, and the second phase was \$5 million. The hypothetical well recovers 320 mbo over 20 years, the hyperbolic decline steadies at around 10 % per year around year 13, and the oil prices increase slowly until they take a jump to \$75 at the field delivery point.

I think it’s possible to load this sheet using Crystal Ball, run 5000 cases, and the answer will be roughly the same: a wise operator will hold off the frac job.

I can understand that small operators are hocked to their ears, but that’s somewhat irrelevant. My analysis uses big company methods. Using these methods it’s easy to conclude that if the little guys lack the staying power the medium size big oil will swoop in and buy those properties.

Provided they think the wells can have first day IP around 600 BOPd and recover around 300 thousand barrels, there will be buyers.

• Rune Likvern says:

Fernando,
Let me see if I understand you right.
What you have performed is what is, where I come from, referred to as a project economics evaluation. And we are talking LTO wells.

You claim that investing \$3M in Year 1 for drilling and then waiting to Year 3 to invest the remaining \$5M to complete (frack) and flow the well is a better alternative than
wait to Year 3 and invest all \$8M in the well in one go and have it flow.
The drilling of the well takes around 1 month and there is now way to say that that one month saved 3 years down the line will be a more profitable alternative due to movements in the price of oil.
Intuitively and using Net Present Value (NPV), except using a discount rate below ZERO (negative), will make the alternative of putting all \$8M in one go in year 3 the best alternative by a considerable margin!!!!!

And I will not carry the discussion into subjects like Return On Actual Capital Employed (ROACE).
If borrowed money is used the drill now frack later alternative gets worse.
If you have the money at hand (\$3M for drilling) you also need to look at costs from opportunity lost.
The well performance does not change between the alternatives, theoretically the drill now frack later may allow for one month earlier start of flow.

• Mike says:

Rune, I got the remark about goat pasture, lol. Is there even any pasture left in the Bakken? Goats have a hard time eating limestone drilling pads, ya know.

Mike

• Rune, that’s not exactly the case. I assume a well is drilled. If the well isn’t drilled then the better option is to try to drill it when prices are really low. For example in six months?

Do the numbers in your head: a \$3 million CAPEX willl have a 1.35 escalator at 10 % pv. A \$3 million CAPEX will mean \$4.05 million cost three years out. But let’s say you can cut costs by 20 %. The well cost is \$2.4 million, the escalator takes it to \$3.24 million. So far you lose.

But now you have a well you can frac and produce on say 120 days’ notice. Activity is down, you watch prices, and go for a frac at discounted prices. Say you get the cost down to \$4.5 million. Now the total is 3.24 + 4.5 = 7.74 million. And you are timing it in a high price window. That well makes a lot of oil the first year. It could pay out in 18 months.

Thus keeping a well unfracked and shut in (TA), if you have it, sure seems to make sense. Ron thinks peak oil is here. Dennis thinks it’s 2018. Their oil company would wait.

Drilling a well now and leaving it unfracked would depend on price expectations, contracts in place, and the need to get data. I assume these guys are running logs and catching samples.

In conclusion, if I’m running a company with legs (say a solid outfit with deep pockets like Tecpetrol or Statoil) I would sit down with my team, pin down a reserve spread, get really hardnosed about understanding OPEX (I think it was shallow sand who described very well how it works), negotiate lower prices from contractors and make a bet.

I wouldn’t frac too many new wells, only try a few to improve techniques and make sure I keep a core staff I can use later.

Regarding opportunity lost. In this price environment they could use the cash to pay off debt and purchase their own stock. But remember I’m not thinking like a little company with goofy tendencies to carry too much debt. I bet Mike doesn’t carry the excessive debt you describe for those Bakken players on steroids.

• Rune Likvern says:

”Do the numbers in your head: a \$3 million CAPEX willl have a 1.35 escalator at 10 % pv. A \$3 million CAPEX will mean \$4.05 million cost three years out. But let’s say you can cut costs by 20 %. The well cost is \$2.4 million, the escalator takes it to \$3.24 million. So far you lose.

Let me see if I get this right, presently they are stacking rigs left and right => prices will likely come down. How the situation is in 3 years as of NOW becomes just guesses.

What you are doing has nothing with to do with NPV or project economics, you are assuming some cost inflation and that is a part of project economics.
Then you make a set of assumptions that prices for drilling will come up by 10% per year and suddenly your \$3M well NOW gets a discount and comes down to \$2.4M! That should apply for “drill now and frack later” and “drill and frack later”.

”But now you have a well you can frac and produce on say 120 days’ notice. Activity is down, you watch prices, and go for a frac at discounted prices. Say you get the cost down to \$4.5 million. Now the total is 3.24 + 4.5 = 7.74 million. And you are timing it in a high price window. That well makes a lot of oil the first year. It could pay out in 18 months.

The reduced costs for fracking you assume apply both for “drill now and frack later” and “drill and frack later”.

Since you have it handy you are likely able to present what kind of minimum price increase for oil your estimates are based upon.
Peak oil does not automatically mean higher oil prices, there are more powerful forces in play that will kick in for price formation and a key word here is affordability .

Fernando, I urge you of reasons for transparency and independent verification and for your own credibility to present your spreadsheet with your estimates for anyone here on POB to evaluate.

The rest of your elaborations are if not fairy tales, then some kind of story.

• What I’m doing is running a full pretax economic model with a 10 % discount rate.
The analysis was intended to understand if there’s a viable option to leave a well unfracked, and standing by to frack later.

However, I can see some companies choosing to drill, leave unfracked, and frack as the market dictates. This depends on each individual company’s taste.

I’ve been a very pricey consultant, and I have had high level discussions with managers who reacted like you do. But in the business we do have to be able to visualize possibilities, and understand why competitors behave the way they do. If you observe companies holding back and leaving wells unfractured then you have a glimpse at their logic.

I would do this on a post tax basis, but I’m too old to worry the details for a hobby like this.

• Mike says:

I agree with everything you said, Fernando, except the idea about drilling more wells and waiting to frac them. I am not sure anybody has the ability to do much of that anymore, save the biggest of the big. I’d let those rigs go, pay the penalties, and deleverage while I am sitting on HBP acreage. But, I am just a country boy who wouldn’t have ever gotten myself in the mess those fellers are in now, in the first place. I am sure they’ll figure it all out. And it will be interesting to see how much “swooping” will go on.

I appreciate your insights, sir.

Mike

• Dennis Coyne says:

Hi Mike,

I think that Fernando’s analysis may be thought of in the following terms. There are a bunch of wells which have been drilled but are waiting to be fracked. Is it better to frack now or wait until prices improve?

His analysis suggests that waiting would be better for the bottom line, if I understand him correctly.

• Mike, I tend to agree. But we are sitting here playing Big Oil. And I can see a big company using a mixed strategy. Keep most of the wells you have unfracked, reducing drilling activity to a minimum (this helps keep top hands), negotiating much better contracts for frac jobs and materials, and keeping a well stock to frac if prices increase.

• Watcher says:

You are gonna need some friends in high places before it’s all over, I’d guess.

One would guess that.

• Rune Likvern says:

Show us the numbers and the assumptions!
GIGO is not dead yet!

• See above. If that’s not sufficient then feel free to ask questions. I’m retired, and this is an interesting hobby. I didn’t think I would be using excel to play with cases like this, but I guess I’m too attached to looking at numbers.

• A. Yeats says:

One other thing that might be happening is an increase in the number of permits being cancelled. I can only find these on the ND dept of minerals daily activity log, rather than a historical trend, but from a random sample there seems to be significantly more such entries this year than at any time in the past. I can’t find anything similar for the Texas RRC but maybe someone else here knows where to look. Also I don’t know what the penalty versus benefit for keeping permits might be, but I’d assume there is some overhead cost to be saved from cancellation.

• Futilitist says:

“The US shale industry is on the cusp of the inflexion point where legacy declines start to overwhelm new production, the net gain becomes a loss and US shale oil output starts to contract.”

So, basically BAU ends in April, 2015.

That’s good to know.

Well, I guess we should get back to trying to understand Maximum Entropy. We are all about to experience it.

• Futilitist says:

Jan 20, 2015…In the State of the Union, Obama says: “The shadow of crisis has passed”

March 9, 2015…The EIA announces: “The shadow of the crisis has returned”

Now, where was I? Oh, yeah…

m=k*exp(-k*t), D=U/(1+C/t^6), U=URR=2,200,000 million barrels (for the model presented here), C=constant determined by best fit to discovery data, in this case C=800 trillion, and t= year where t=0 is 1870, t=1 is 1871, etc.,P2=P1+n-e where P2 are the cumulative producing reserves at the end of year 2, P1 are the cumulative producing reserves at the end of year, n= new producing reserves added to P1 in year 2, e= oil extracted (or produced) from P1 in year 2
r=e/P1= extraction rate, etc.m=k*exp(-k*t)

So, basically…

k*exp(-k*t)+1870/P1+n-eU*(1+C/t^6)
+1871/P1+n-e*%&@#\$!!! = URR about to Collapse

Is that about right? 🙂

• ChiefEngineer says:

The nations fuel tanks are full and importing less oil at a lower price than anytime in say — Decades.

I’m sure the American drivers on their way to the 290K new jobs last month are having a hard time concentrating behind the wheel because of the EIA March 9th announcement.

• Futilitist says:

Dow Jones Industrial Average (^DJI)  Watchlist
17,783.06 -212.66(-1.18%) Dow Jones – As of 9:51AM EDT

WTIC spot \$49.40

• Futilitist says:

Dow Jones Industrial Average (^DJI)  Watchlist
17,739.26 -256.46 (-1.43%)Dow Jones – As of 1:54PM EDT

WTIC spot \$48.39

• Futilitist says:

Dow Jones Industrial Average (^DJI)  Watchlist
17,662.94 -332.78(-1.85%) Dow Jones – As of 4:04PM EDT

WTIC spot \$48.61

• Dennis Coyne says:

Hi Futilitist,

No the URR will not change by much, but oil output will decrease and oil prices will increase, it is likely this will lead to either a recession or depression depending upon how quickly output decreases and oil prices increase.

Possibly people will realize that public transportation, higher density living, more insulation, better windows, passive solar house design, EVs, PV, wind power, geothermal, and nuclear are better options than continued fossil fuel use. Or everything could simply collapse as you assert.

Reality may fall between these extremes.

• Futilitist says:

Hi Dennis.

(URR = You are…) 😉

I think we are entering a recession right now.

Recession Alarm: Wholesale Sales Plunge Alongside Factory Orders, Worst Since Lehman

http://www.zerohedge.com/news/2015-03-10/recession-watch-wholesale-sales-plunge-worst-lehman

For the first time since Lehman, Wholesale Trade Sales dropped for a 3rd month in a row in January. Plunging 3.1% MoM (against -0.5% expectations), this is the biggest drop since March 2009. Excluding auto sales, wholesale sales fell 3.5%. Wholesale inventories rose 0.3% (beating expectations) with only a very modest -0.1% drag from oil.

This chart is pretty scary:

• Dennis Coyne says:

Hi Futilitist,

It does not look like a recession in the US at present to most economists, but then for every 3 economists in a room, you get about 9 different forecasts. Nobody knows when a recession has begun until 3 to 6 months after it has begun and it is based on GDP. See chart at link below

http://research.stlouisfed.org/fred2/series/GDPC1

• Futilitist says:

We will just have to wait for official confirmation then, Dennis. In the meantime, I will remember your arguments here so that when the recession is announced you can recant pretty much everything you have ever said on this site.
You have zero credibility.

And your Oil Shock Model with Dispersive Discovery is totally useless and a complete waste of time. It is just a needlessly complex system for producing your hopeful fantasies. I have no idea why Ron chose to post your paper on his blog.

• It is just a needlessly complex system for producing your hopeful fantasies.

What bit of analytical science has ever contained the ingredient “hope” ?

• Futilitist says:

Good analytical science tries to control for the optimism bias.

• OK then give me some examples, in terms of the quality of the data that we get.

• Futilitist says:

Hi Web.

I don’t think that is the right question to ask.

A better question would be:

What useful thing did we actually learn from Dennis’ analysis?

• A better question would be:

What useful thing did we actually learn from Dennis’ analysis?

That there are people with knee-jerk contrarian reactions to anyone posting a substantive mathematical analysis.

Luddites don’t necessarily want to use math to confirm what they seem to intuitively know. This goes with the territory … we should be used to it by now.

• Futilitist says:

Web,

I like math. I took calculus and physics. I have a degree in Biomedical Visualization. I was a professional mechanical designer in both motion picture special effects and robotics research. I helped break new ground in CG surfacing techniques using hierarchical B-splines. I invented the GMT (generic topology model), and designed the DreamWorks facial animation interface. I am certainly not a Luddite.

And you really didn’t answer the question, did you?

So, what useful information did we actually learn from Dennis’ little dispersive discovery exercise?

• So you actually do understand the importance of research and new ideas. Can’t have it both ways.

• Futilitist says:

Dodge and weave.

So, what useful information did we actually learn from Dennis’ little dispersive discovery exercise?

• So, what useful information did we actually learn from Dennis’ little dispersive discovery exercise?

You keep on saying “we” learned. Well, I have no idea what you actually learned. If you say that you didn’t learn anything, well that’s that.

So you are waiting for a response that I can not possibly give you.

• Futilitist says:

Dude, what is the purpose of Dennis’ model?

What is it’s utility?

How is it useful?

What is it useful for?

What did you learn from Dennis’ model?

What would you hope others might learn?

What was the reason for making the model?

Has the model produced any useful information?

Did you or Dennis have a hypothesis?

Was it confirmed or disconfirmed?

What are the implications of this work?

How does the model advance science?

Are there any practical applications?

What was the point?

What was the intent?

What was your aim?

What was the reason for building such a model?

Is the model really predictive of anything?

What’s the big idea?

What’s up Doc?

What is the main concept?

What is the significance of the model?

After running the model, what was the conclusion?

Did it perform as expected?

What did you expect?

Isn’t URR just a dependent variable?

Why shouldn’t the model be seen as circular?

What does the model indicate?

What are the areas for further investigation?

What conclusions did you draw?

What inferences can be made?

What is the value of such a model?

What is the main benefit to society of your model?

What is the model’s “raison d’être”?

URR kidding, right?

• Generally, learning is a continuous process and is not one and done. There would be no market for new textbooks on old physics topics if that were the case.

DC’s partial intent as I can gather was to re-explain and simplify the ideas from the book that I wrote on modeling oil reserves :

This contains chapters on The Oil Shock Model, Dispersive Discovery and other topics.

Is that a satisfactory answer?

If not, I can start pulling out excerpts with illustrations. And then you can indicate when you are starting to learn something.

• wimbi says:

Well, for what it’s worth, I just got back from a town meeting which, if you can believe it, was discussing all those things you mention, and were talking about setting up a public bank to fund them.

But not nuclear. Up front cost a bit high.

I got to do my show-and-tell about getting my house entirely on PV.
The best strategy against fracking, a big problem locally.

Does that mean us folks around here aren’t human, since it “ain’t human nature” to do that sort of thing?

9. Dennis Coyne says:

Hi all,

I realized a mistake in my modelling. For the United States there are about 36.5 Gb of proved reserves of C+C and about 21.9 Gb of these reserves are “producing reserves” (developed and have started producing oil).

I mistakenly added the probable reserves of about 12 Gb (about 33% of proved reserves) to the producing reserves when they should have been added to the non-producing reserves. So the bottom line is that for the United States only about 45% of 2P reserves are producing reserves in 2013. For 1996 to 2011 the average ratio of producing to 2P reserves is about 60%.

This mistake led me to reduce the average time from discovery to producing reserves in an attempt to get the World level close to the US level which I had mistakenly calculated at 79%. I will rework the model with the assumption of about 45 to 50% of World 2P reserves being producing reserves.

My apologies.

• Sam Taylor says:

Do you think this will have a significant impact on the ultimate outcome?

• Dennis Coyne says:

Hi all,

At the end of the original post I added a few more charts and explain that the US producing reserve to 2P reserves are about 61%, rather than the 79% I estimated initially. Changing the model so that the World producing reserve to 2P reserve ratio is less than the US (about 50%) does not affect the model much. Chart below.

• A. Yeats says:

What is striking to me is how various models concerning oil/energy are converging to similar shaped curves with a maximum at2015/2016 and (most) then showing accelerating decline to an inflexion around 2030 or 2040 – i.e. the oil peak in 2015 predicted on this site; the loglets based oil supply model from Luis de Suisa; the Melbourne University update to the limits to growth model (curves for death rate and per capita output); and Gail the actuaries energy supply predictions (although these show more rapid decline and I don’t follow her “low prices cause collapse” arguments at all).

The oil export issue should also be considered – if recent rates of growth of internal consumption by producing countries continue there won’t be any traded oil by about 2040 – it will all be used locally or exported under guaranteed agreements (Venezuela – China, Russia – China, Canada – USA).

I think the route down will be a lot bumpier than shown, and I might not be around (even based on current life expectancies) for the final collapse, but if this holds then looking forward and knowing all the time that next year is going to be worse than this one is … not good in any way.

• sam Taylor says:

I’m very sceptical of whether the loglet model has any predictive value. It just looks like curve fitting to me. The oil shock model is at least bottom up.

• Thanks Sam.

I am also involved in an effort to try to model global temperatures, called CSALT. Dennis was brave enough to try his hand at that too and it is an intriguing approach. Again, this temperature model is bottoms-up and uses known factors to try to fit the variation and trend.

The green is data and blue is the model.

• Caelan MacIntyre says:

Uh-oh, a climate-related graph… Watch the anti-climate drive-by folks pop in again. ‘u^

I guess most here know that governments employ people to simply monitor the media? But inasmuch as the old-mainstream media appear as more or less ‘bought-and-paid-for mouthpieces’, so those who monitor the media have to venture further afield, perhaps right dab onto sites like this.

• Don Jensen says:

What does this latest effort in modeling run on? The satellite data which only goes back a few decades and isn’t long range enough to make any meaningful predictions about the future climate state or the land based gauges NOAA and NASA have been caught multiple times adjusting and readjusting or leaving in artificially warm urban areas so as to push a radical economic agenda that would be crippling and devastating to entrepreneurs and our uniquely American standard of living?

• Caelan MacIntyre says:

“…uniquely American standard of living…” ~ Don Jensen

The one that involves unilateral foreign military intervention based on lies, fabrications and false pretexts? Collateral murder? Torture? Drone attacks?

Or do none of those exist in your mind, like climate change?

BTW, did you come up with that copy all by yourself– ‘uniquely American standard of living’- or do you have a managing editor hovering over your shoulder, like the NSA?

“Traditional communities do not often voluntarily give up or sell the resources on which their communities are based until their communities have been destroyed. They also do not willingly allow their landbases to be damaged so that other resources—gold, oil, and so on—can be extracted. It follows that those who want the resources will do what they can to destroy traditional communities…
Our way of living… is based on, requires, and would collapse very quickly without persistent and widespread violence.” ~ Derrick Jensen

• Don Jensen says:

Uniquely American standard of living refers to how the The Founding Fathers of America created a nation with values based upon the God given rights of life, liberty, and personal property combined with a small, limited government. This developed into a nation where even the poorest have a higher standard of living than most of the rest of humanity can even dream of.

98% of Americans have a television, 98% of Americans have a refrigerator, 98% Americans have a stove, 94% of Americans have a microwave, and 84% of Americans have air conditioning. No other country in world history has had as much success as the USA in creating such a high standard of living. But if the climate change devotees get their way, the entire capitalism based American economic system responsible for this success would be thrown out and replaced with an economy controlled by a big, powerful central government. All such economies have failed everywhere in the world they have been attempted, and the USA would be no exception. This is why the current climate change propaganda coming from the left-wing academics, politicians, and philosophers represents the biggest assault on the American free enterprise system since the start of the Cold War.

• Fred Magyar says:

No other country in world history has had as much success as the USA in creating such a high standard of living.

Umm, guess you didn’t get the memo that this high standard of living you speak of was only made possible by all the free energy slaves contained in billions of barrels of oil Americans had access to…
You do realize that a single barrel of oil contains the equivalent energy of approximately 11 years worth of human labor, right?

BTW, Just curious, how many countries other than the US have you actually lived in?

98% of Americans have a television

Thank DOG I’m a member of the remaining 2% ! At least I don’t get all the non stop brainwashing that you seem to have been subject to.

Cheers!

• Nick G says:

if the climate change devotees get their way, the entire capitalism based American economic system responsible for this success would be thrown out and replaced with an economy controlled by a big, powerful central government.

Nah. A simple carbon tax would do it. We already have fuel and utility taxes, so there would be no expansion of government or regulation at all.

• Donnie, It is uniquely American to be a weather geek, or a commodities watcher.

What exactly is your problem?

• Caelan MacIntyre says:

On top of climate change, we have far more to worry about now, thanks to your disaster for an ‘American standard of living’.

The anti-climate-change spin-doctors are hard at work making sure we have NO standard of living left.

Here’s a little something about your Constitution, which isn’t worth the parchment it’s written on, from someone who practices law:

“We all know the story that’s been embedded in our heads since the First Grade. That the wise Founding Fathers of this nation demanded independence, threw off the shackles of England, then wrote a Constitution that guaranteed rights and liberties. In the process, as the story goes, they established rules for amending the Constitution so that it could reflect the needs of each new generation.

But when we uncover the stories of the unnamed people like ourselves throughout our history, we find some troubling parts to that story, such as:

Slaves, indentured servants, women, native persons, and white men who didn’t own property were not considered ‘persons’ at the time of the drafting of the Constitution. In fact, the Constitution placed the full force and resources of the federal government behind the return of slaves and indentured servants to their owners. They had no rights and no remedies.

The Constitution itself was the product of a secret gathering. Minutes of the meeting were not published for over fifty years. Talk about ‘right to know’!

The Constitution established the most powerful Supreme Court — vesting the powers of the Court in judges appointed for life to enforce the ‘rule of law’ — of any Court in any country on this planet.

The Constitution denied people the ability to directly elect our Senators to the U.S. Senate.

The Constitution enabled the passage of the Fugitive Slave Law in 1793 and 1850, which placed the power of the federal government behind slave owners seeking the return of their property. Under the Law, aiding an escaping slave or indentured servant (known as ‘bonded labor’) became a crime punishable by jailing, the slave was prohibited from testifying on his or her behalf, and a trial by jury for the slave was prohibited. Slave catchers were paid a bounty by the federal government with public monies…

The Interstate Commerce Clause, the Contracts Clause, and other parts of the Constitution guarantee that the rights of property, wealth, and capital will continue to override the rights of people, the planet, the rivers, streams, egrets, bears, and mountains.

In almost all ways, the Constitution’s protection of property over communities and nature serves to shield the few who rule from democratic control.

Without democratic control over major decisions governing the health and welfare of our communities, our planet and our communities are set on a suicide run.” ~ Thomas Alan Linzey, Esq., 2004

• sam Taylor says:

I’m always amused by this line of reasoning. Most NASA scientists are guys who enjoy and have benefited from America’s infrastructure, education and such, and for some reason (perhaps they read Marx?) they want to concoct a theory so that they can tear down the system that nurtured them. Maybe to spite ayn rand?

When i was younger I always thought that Americans used to be the most rational and forward thinking of nations. Many great thinkers and scientists to be proud of. But it saddens me that there’s such a significant community of cranks like you, who place ideology and fear before objective reason. You’re not so different from those madmen in Iraq.

• Dennis Coyne says:

Hi Sam,

There are people with strange views all over, percentage wise there may be more of these sorts in the United States and politically the US is pretty far to the right of Europe, Canada, Australia, and New Zealand. (I believe you may be from the UK but I forget.)

• ezrydermike says:

he is completely reading scripted responses

• Fred Magyar says:

NOAA and NASA have been caught multiple times adjusting and readjusting or leaving in artificially warm urban areas

While the adjusting part is technically true, they weren’t exactly CAUGHT because there are perfectly valid reasons to do that. Those reasons are transparently available to anyone who wants to examine them. Google is your friend…

so as to push a radical economic agenda that would be crippling and devastating to entrepreneurs and our uniquely American standard of living?

Now THAT, is pure unadulterated finely refined Yak Dung, (which btw is generally indistinguishable from male bovine feces, by the lay public), I actually work with a number of entrepreneurial groups and can tell you that quite a few entrepreneurs are doing just fine thank you, by starting businesses that are going against the grain of BAU and they are getting plenty of support from very savvy venture capitalists. I can provide detailed info upon request. But again you don’t have to take my word for it, Google really is your friend.

• Don Jensen says:

These are still major issues with what the climate change theory has been based around. Faking and/or misinterpreting temperature data has gone back some time now, most of it came to light with the whole hockey stick scandal and the desperate “hide the decline” emails, phone calls, and seminars you may have read about. As exposed on the talk radio years ago, the only validity with this was to keep pushing the agenda even after the actual data came in and started refuting the agreed-upon theory. This all had HUGE detrimental implications on public belief in the theory and trust in the scientists.

I’m sure there are some entrepreneurs out in the world like the ones you mention. But, just remember, the actual climate change researchers rely on the government for their funding, and thus, their livelihood. There is naturally going to be a huge amount of bias with that kind of a system. Furthermore, any time the currently overextended, ineffectual, parasitic government gets involved in something, ordinary citizens will eventually end up suffering. If you are of a certain age, you might remember how 30 years ago government scientists told us with “high certainty” how margarine was much healthier than butter, that coffee was bad for you, and that 8-9 hours a sleep per night was required for everyone. All of this “useful” advice has since been discredited through work done in the significantly more effective private sector.

• Donnie, You see this chart of temperatures below?
This is not really that hard to interpret. All that variation is simply the result of El Ninos and the occasional volcanic eruption acting to cool the temperature temporarily.

This is simple weather geek stuff — not your depraved imaginings that some conspiracy is behind it.

• John B says:

It’s not hard to interpret that there has been no significant warming for the past 10 years. I’m pretty sure CO2 has continued to increase.

According to the omniscient climate scientists, there should have been a .2 Degree C increase.

How do you explain the lack of warming for the past 10 years?

• Caelan MacIntyre says:

“How do you explain…” ~ John B

I guess it depends in part on who or what one is trying to explain whatever to…

For example, I am unsure a chimp would understand some things, no matter how hard one tried.
Well, maybe they would understand some things, but pretend not to, so that they could get their banana reward.

…I wonder what life will be like with insignificant warming per year in 100 years, and how significant it would be then.

“It is difficult to get a man [chimp] to understand something, when his salary [banana] depends on his not understanding it.” ~ Upton Sinclair

• John B says:

No offense Caelan, but you have to be an omniscient climate scientist to answer these kinds of questions.

Let’s let Mr. Hubble answer.

• Slop John B, How can it get cold at night during the beginning of summer?

• Donnie, You realize that to have a conspiracy to modify the temperature data, they would all have to know the exact complicated variability in the graph that I drew.

In fact much of the erratic nature is due to the temperature fluctuations caused by alternating El Ninos and La Ninas, which are essentially measured by atmospheric pressure measurements in two locations, Darwin and Tahiti. One can wipe out all the temperature measurements and still effectively model temperature over the past 130+ years just by monitoring those two values.

Sure, you and your buddies can go on believing that scientists have been manipulating the data. Makes you guys look like 911-Truthers.

• Jen says:

The winners of NASA’s Award for Scientific Achievement is the source for the claim that there’s been no warming for at least 224 months, actually. They handle the RSS MSU satellite temp data.

• ezrydermike says:

Paul Clark?

10. SRSrocco says:

Dennis,

Nice charts and guest post. I have one question for you. Early on, the world discovered a great deal of oil fields, thus we increased our global oil reserves substantially. I would imagine these earlier reserves were probably a higher EROI, than the remaining reserves we have today.

Have you or anyone given any thought to the notion, “ARE ALL THOSE RESERVES COMMERCIAL?” I have mentioned several times, that I believe the world cannot afford shale oil or tar sands without the Fed & Central Bank’s Bazooka providing the world with \$trillions of liquidity.

So, again… are these supposed remaining oil reserves just as EROI PHAT as the reserves found in the 1930-1950’s? I mean, do we really expect the downside of the peak oil graph to be similar to the upside??

steve

• SRS, field/reservoir quality has been dropping for years. This is easy to prove by looking at the \$ per barrel it takes to explore and produce. The figures people see can be distorted by taxes, and this makes the story even worse. I’ve worked in countries where overall government take exceeded 85 % of the gross. The only recent contracts for really juicy fields were the ones in Iraq, and the government keeps a mobster share of the gross. But that’s a special case.

• Doug Leighton says:

“SRS, field/reservoir quality has been dropping for years.” This is the most underrated component of almost all future production prediction scenarios, in my opinion.

• shallow sand says:

Doug, you hit the nail on the head. As of the last Baker Hughes rig count report, the United States is down to 177 rigs drilling conventional holes, which I assume means vertical. This is both oil and gas. I went back and looked at the EIA historical data, and this is a historically low number.

The remaining reserves in this country are difficult to extract. Compounding the problem is these expensive wells have no staying power. For example, in the Bakken, it appears most wells will be producing under 50 barrels per day within 72 months of completion. The means that OPEX rises quickly per barrel.

Say a Bakken well pulled at random, completed in 2012, is providing the working interest owners 120 barrels per day at present, assuming the working interest owners have a .80 net revenue interest. Let’s say OPEX is \$21,600 per month, or \$6 per barrel.

By the end of 2018, the well is now producing 40 barrels per day for the working interest owners. My experience has been the OPEX will be the same, or higher, not per barrel, but just the total amount paid out each month. Electricity will cost at least as much, so will down hole chemicals and labor. Water hauling will also cost the same, unless the wells make less water as they decline. Roads and location will still be at least as much. Down hole failures will cost as much, if not more. May become more frequent given aging down hole infrastructure. What about casing holes developing? How much will a squeeze job cost in a 20,000′ hole, half of which is sideways?

So, if in 2018, assuming we have no inflation, \$21,600 of monthly OPEX is now \$18 per barrel. I know some will argue it should go down as oil produced drops, but in my world it does not. We have two leases that have six producers and two injectors, all producing and injecting in the same zone. One lease produces 9 bbl per day, the other 4 bbl per day. OPEX is almost identical. But of course per bbl on lease A is less than half that on lease B. Lease A is still profitable at \$50 WTI. Lease B is at a loss, and absent improvement in pricing, some tough decisions will need to be made.

So let’s expand this to drilling in ultra deep water and the Artic Circle. So we hit big IP wells? What will their staying power be? I have to think if these wells do not produce substantial oil for many years, they will have the same problem the shale wells do now.

I cannot fathom that companies are seriously looking for oil in the Artic. Or 8,000′ of water. I know these things can be done, but serious limits are being pushed. Kind of like the photos of 40 frac trucks lined up for one well, knowing this is being replicated a thousand times every month, or at least was. And yet somehow oil is set to have the lowest yearly price on average since 2004. It boggles my mind.

• Shallowsand, it sure looks like the majority of oil companies need upwards of \$70 to \$80 per barrel to stick around for the medium term.

• Watcher says:

Cue Jeffrey’s distillate chart.

• SRSrocco says:

Fernando & Doug,

You hit the nail on the HEAD. I think we have totally underestimated what you all refer to as “RESERVIOR QUALITY.” I believe the downside of the peak oil graph will resemble more the SENECA CLIFF, rather than the more symmetrical graphs using remaining URR via Hubbert’s Linearization.

Those reserves are just reserves on paper and not based on economics.

steve

• Rune Likvern says:

Steve,
We will get what we, the consumers, can afford.

• SRSrocco says:

Rune,

Gold bless ya. While I agree with the principle you put forth, “We will get what we, the consumers, can afford”… there’s a qualifier to that statement.

This is the POINT I am trying to make altogether. We have no idea, WHAT THE CONSUMER CAN AFFORD anymore. Thanks to the magicians and sorcerers at the Fed printing money and creating unlimited contracts to naked short gold (and silver) into the cesspool.

I would imagine, when we do finally experience the popping of the GREAT SHALE ENERGY PONZI SCHEME (as Art Berman labels it)…. the world will come closer to finding out what they really can AFFORD.

Lastly, this will probably be the same time when the world finally gets GOLD RELIGION.

steve

• Rune Likvern says:

Steve,

Let me elaborate a little more on my statement.

Dennis has put down a lot of hard, professional and conscientious work and kindly shared it in this nice post about future projections in global oil supplies.

I have for years been looking at these things from the statement;

Demand is what you can pay for!

Reality now is TOO MUCH DEBT, which allowed (when global credit/debt was growing and maybe still does) to increase oil consumption (demand) and also helped negate the higher prices while those lasted.
What central banks fear is deleveraging and deflation and will throw whatever they have available (including the kitchen sink and whatever sacrifice they have handy) at it.
Something happened to price discovery also for oil …and gold.
In my view we are at an inflection point also when it comes to what we can afford of costlier oil.

Affordability has been/is achieved by using a growing amount of credit/debt which added to aggregate demand and gave some tolerances to a higher price (also for oil). The market does not recognize oil for what it really is; ENERGY and our most important master resource. For the market oil is just another boring commodity.

When it comes to global total levels of credit/debt we are fast running out of runway. Rule changes are introduced to allow for some more debt creation, like including coke and hookers in GDP estimates. Next up will be walking your dog is counted as economic activity!!! (I kid you not! ;-))

Credit/debt is key (oil is part of the global financial MATRIX!).
Less debt creation and or deleveraging (default is one way to deleverage) and we are in deflationary territory where incomes come down (affects affordability and already happening in the real world!). More of the same is on its way.

At the same time we are fast running out of affordable oil.
Since you are mentioning tight oil, the reality is that many companies have and will take losses and the companies’ losses become the consumers’ gains. It is a kind of subsidizing the consumers.

Again and in my humble view, we are now living through a CATCH 22 experience; more oil is available, but our affordability for it is declining!

• SRSrocco says:

Rune,

There isn’t one thing in your comment that I would disagree with.

steve

• Nick G says:

Or, we’ll switch to better and cheaper alternatives.

EVs are the cheapest cars on the road even without tax credits. With tax credits, they’re insanely cheap. Let’s see. The average car costs about 58 cents per mile to drive.

IRS Average New Car Cost per mile: 57.5 cents per mile.

The Leaf, without tax credit, is the cheapest car you can find to own and operate:

Total Cash Price \$25,327

5 Year True Cost to Own: 28,079

Cost per mile: 37.4 cents per mile.

A typical small car like the Honda Civic Sedan is more expensive:

Total Cash Price \$21,644

5 Year True Cost to Own: 36,154

Cost per mile: 48.2 cents per mile.

And a Chevy Volt, a car without any compromise because it can run on gas, is less expensive than the average car even without the tax credit:

Total Cash Price \$31,500

5 Year True Cost to Own: 40,129

Cost per mile: 53.5 cents per mile.

If we subtract just the Federal credit of \$7,500 (and several states have credits as well), that subtracts 10 cents per mile. The Leaf costs less than half of the average car, and the Volt is substantially less expensive than the Civic.

And, you very rarely go to the gas station, and it’s much more fun to drive!

• Sam Taylor says:

10% annual capex increases at the major IOCs would suggest that maybe the EROI isn’t quite what it was. Probably going to make the downslop a bit steeper than the up. It’s a lot harder to suck treacle through a staw than cola!

• Dennis Coyne says:

Hi all,

If extraction rates fall due to poor reservoir quality, then the decline will be steeper.
So far there is no evidence that extraction rates are falling, in fact they have been rising since 1993. I assume that this cannot continue forever and that extraction rates will level off by 2025. Up to this point the decreases in reservoir quality have been offset by improving technology, but there is no reason that extraction rates cannot fall.

If we assume they fall from 7.7% in 2025 to 3.65% by 2050 we get the following model.
Note that until we see a collapse, which so far is not apparent to most (that is, it will happen in the future rather than the present) this scenario does not look realistic, but perhaps collapse will be apparent by 2025, this is unknown.

• Dennis, i think you are right, but there’s also a human factor involved.

Say the extraction rate (extracted versus reserves available) drops…then one could do something to increase it (what we call rate acceleration).

Say we have a lousy reservoir, a low permeability reservoir in Oman. Low extraction rate is attributable to low permeability. We can drill infill wells. But only if the price is high enough. However, if we think prices will be higher in the future then rate acceleration will show negative returns, so we let it be and keep producing the wells we have.

This makes me develop some sort of EOR project. But an EOR project increases reserves. So we may see the extraction rate stay the same.

So if everybody behaves rationally, thinks prices will increase, then the lower quality reservoirs will drop the extraction rate.

This may be masked by our ability to drill smaller high quality pockets we deplete in five years, like some of what’s done offshore.

Hell, it’s too complex to figure out.

• Dennis Coyne says:

Hi Fernando,

Reserve growth is part of discoveries in the model, I agree that extraction rates may or may not decline, it is a battle between improving technology and methods and geology which will be won eventually by geology.

We do not know when extraction rates will decrease, but eventually they will as reservoir quality decreases. We also do not know how quickly the extraction rate will decrease, we only know that they have been increasing rather steadily since 1993.

In the scenario below I assume extraction rates level off by 2024 and then decrease at about 3% per year (10% in year 1 to 9.7% in year 2, etc) from 2028 until 2060. Chart below.

11. Caelan MacIntyre says:

There might indeed be 100 years plus worth of energy independence for the USA if its shale plays get shut down temporarily and manufacturing returns home.

Likewise, if the price of oil hurts a few nation-states’ global oil markets, then it would appear to be some kind of contraction, whether managed or not.

Anyone know what percentage of oil production goes to global shipping?

Certain levels of global markets/trade-redundancies/resource-squandering only seem to make sense with certain levels of cheap energy.

“Made in North Dakota” ^u’

12. T. G. Neason says:

I am a lurker that comments infrequently because I really have little or nothing to add to this fantastic blog. However, this is an unsolicited critique of those who do frequently comment.

Again , I thank Ron for this great service. Ron and I have a lot in common. We grew up on southern share cropper farms, got our technical education in the US military and used that education to earn a living and raise families. Both of us were raised in evangelical Christian families. As we grew into adulthood we parted ways on Christianity. Ron, if I have made a misstatement, I apologize.

Now to the regular commentators:

WHT : You are obviously a brilliant man but your arrogance and pomposity is so offensive that, I suspect, many refuse to read your comments.

OFM: You have a lot of excellent insights but we really do not need to read in most every post your ag, biology, nursing, etc credentials.

Dennis: you have excellent input but your constant ‘all is well or will work out’ is abrasive and hollow.

Futilist: Your approach global warming as a Southern Baptist trying to “pull a burning branch from the fire“. If we are past the point of no return, give it up and focus on preparing to cope. I decided 25 years ago that we are past the tipping point and I devote everyday to planning and preparing to make sure that my children, grand children, and great grand children (I am 81 years old) will be a part of the remnant. Ron and OFM will understand that phrasing.

I read Mike, Shallow Sand, Fernando, and Tool Push twice or three times cause they are the ‘real authority’, at least in my opinion. Coffee guy not so much . He reads like a shill!

Doug gives me laid back wisdom. Insight that passes the test
of validity.

Mr. Brown is a National Treasure!

Watcher is sometimes out in left field but he deserves extra special attention. He has valid insights that few ever achieve.

I realize that his pisses off a lot of people but my intent is to help you be more effective in supporting this valuable asset!

• Futilitist says:

Hi T. G. Neason.

I am proud that my efforts have prompted you to make a rare post. I am glad that people here are reexamining what we are all doing here, and what this discussion is all about. It is good to do that every once in a while. It shakes out the cobwebs and makes for a much better discussion in the long run.

• T.G., you nailed it. We do have a lot in common. Thanks for the comments.

• shallow sand says:

Thank you for the compliment TGN. This site gives me an opportunity to learn quite a bit, plus vent during what appears will be the most trying time I’ve had with owning working interests since 1998-early 1999. The problem is, in 1998 I just operated 6 bbl per day. That has grown considerably and also includes employees who average over 30 years field experience each. All but two started in the 1980s boom, two have been out there almost 40 years. So probably could be most trying, unless we can get a \$15-20 rebound in second half of year. Heck, even half of that would help a lot.

Anyway, thanks. I’m just trying to provide a viewpoint that few others here have. Please keep in mind, however, Mike, Fernando, Toolpush and Mr. Brown have much more technical knowledge than me. For that matter, Doug knows much about subjects involving major projects that I haven’t a clue about. Our operations and geology are about as simple as they come.

• Puffalar (Your Five-Alarm Puff) says:

Well, I appreciate Wikipuff. Don’t quite know why, but there you go.

• Mike says:

Thank you, Mr. Neason.

Mike

• Can’t do math by anecdotes.

That’s why what Dennis is doing is so valuable.

• Dennis Coyne says:

Hi T.G. Neason,

I apologize for offending you. I guess you prefer an echo chamber where everyone discusses how bad things are and that there is no potential solution. My position is essentially the same as Old Farmer Mac, things will get very bad, but there is a possibility that things may work out. Nobody knows what the future will bring. Does the oil forecast here look particularly optimistic?

• DC, Have to stay somewhat positive. The worst position to be in is in the knee-jerk contrarian mode. There is this fellow called Ben Pile who is criticizing the solar-powered circumnavigating plane because …

This "solar powered plane"… It's a glider, right? http://t.co/r5sA1jgxWR— Ben Pile (@clim8resistance) March 10, 2015

• Dennis Coyne says:

Hey Paul,

I am having a little difficulty answering Lexilis’s question below, I am not nearly the mathematics whiz that you are, perhaps you can answer his concern over my glossing over some of the statistical details in the Oil Shock Model.

• sunnnv says:

So what is his complaint?
The Solar Impulse 2 is like 4+ times faster than the Gossamer Albatross,
and you don’t have to pedal. It can fly (on batteries charged during the day) all night long, and has an autopilot so you can sleep.

Who would want to pedal from Muscat, Oman to Ahmedabad, India in a single day anyway?
😉

Looks like they made that leg at 93 km/hr, faster than sailboats…

What did people say about the first automobile, etc.?
Did somebody say “get a horse” to the first person who rode a horse?

This guy notes that his Tesla Model S has a longer range than the 1946 Piper J-3 Cub he flew cross-country.
http://www.greencarreports.com/news/1096690_tesla-model-s-cross-country-trip-without-many-superchargers-days-1-3

• ChiefEngineer says:

“Who would want to pedal from Muscat, Oman to Ahmedabad, India in a single day anyway?”

A person who was planning on living a long healthy life.

Bikes don’t burn fossil fuel and are the best cardio exercise

• Ronald Walter says:

WHT

here

Not who or what I am

Whatever scamwarners are, I have never heard of such a web site.

I am not out to scam anyone, I have no agendas, nothing of the sort.

End of story!

• I am sorry. When you first commented here, your name rang a bell with somebody else known as a scam artist.

• Futilitist says:

Hi WebHubTelescope.

“That’s why what Dennis is doing is so valuable.”

Valuable? For what, exactly?

“DC, Have to stay somewhat positive.”

Dude, you’re telling Dennis to be more optimistic? Seriously?

• nNgass says:

TGN your arrogance pisses me off. You think only your ides are the right one.
Examples:
“….but your arrogance and pomposity is so offensive that, I suspect, many refuse to read your comments.” How dare you to suspect since you are a lurker without any contribution. Or did you made a survey to prove your uttering?

“….but your constant ‘all is well or will work out’ is abrasive and hollow.” To whom? How dare you to pretend that we all think that? If you had added “in my opinion” then it is your opinion but not that of other readers.

“….but my intent is to help you be more effective in supporting this valuable asset!” You have not contributed anything but criticism because people are not aligned to your ideas and yet, in your self-glory you intent to help us. Can you tell us how to make us more effective?

• Caelan MacIntyre says:

Get back in line, soldier! This is The General you are talking to! You now have a reprimand on your record, you must report to Direction tomorrow 5 am sharp for further disciplinary hearings, and are banned from all leisure activities for the next 6 months!
Is that clear, soldier!? What did you say?! Louder!

Is there anything else you want to say to The General!? You’re damn right!

You will be marching outside here two hours after your troop heads for the mess hall! I hope you ate well earlier today!

Suck in that gut and push out that chest!…

13. clueless says:

It looks more and more like now is a good time to invest in quality oil and gas stocks, at least to me. Especially if you are younger. Does not look too be much downside risk at this point.

• ChiefEngineer says:

Ok Clueless, would you like to name names ?

In Dec & Jan I sold off some T & INTC and bought WNR, VLO and CRC. Last week after the WNR earning report I sold off 75% of the WNR I bought and made about 30% on it(sitting on the cash). The VLO and CRC are also currently up about 30% plus. I want to hold on to the CRC(as the price of oil returns, it should do well), but over the next few months I would like to move more of my refinery equities to the majors. I don’t think the refineries are going to peak until sometime between June and August. I also don’t think the majors have bottomed yet, but they must be getting close. What’s your take ? I agree about your risk take if your talking about the majors (XOM, CVX, COP, OXY, RSA) or refineries. I think it’s to early to be buying drilling producers (DVN, APA, RIG etc. ).

Penny for your thoughts

• After I came in and started reading this blog and went over the material posted I decided the extra oil supply would be short lived, and bought a mix of stocks with solid dividends, emphasizing drilling and service companies. But I don’t buy and sell very fast. The idea is to keep the stock for at least five years. To be honest, I don’t even look at the price after I buy a stock, so I don’t know if they went up or down.

• Watcher says:

Ya, of course not. Why would anyone ever look at the price of their portfolio contents?

• I look at the total. I look at the details about once every six months. I read that paying too much attention to a portfolio is bad for your health.

• ChiefEngineer says:

Fernando,

You have been here at this blog since before the resent collapse of the oil prices. Service and drilling companies have had been crushed over the last few months. It’s a good thing you don’t look at your portfolio but once every five years. You might want to keep your day job a little longer.

• Chief, I retired. I bought these stocks on January 28 and 29. I just checked what they are doing, the overall loss is 3.3 %. However these companies pay hefty dividends. As long as dividends aren’t cut more than 50 % I’m doing pretty good. If peal oil hits within the next three years I’m looking at 100 % price increases and dividends running at 10 % of my purchase price. There’s risk but it’s just a small fraction of what I invest.

• clueless says:

I am somewhat reluctant to make specific recommendations because everyone’s situation is different. But, if I were advising someone who did not have an exposure to the energy industry, I think that this is a reasonable point in time to put some money into the area. Briefly, looking back over the last 10 years, it seems clear to me that the amount of oil that is needed is greater than supply AT THESE PRICES. As Jeffrey Brown has pointed out, the Saudi’s significantly increased exports around 2005 and were not able to stem the price increase. Further, at this point in time, looking worldwide there are virtually no planned projects that are profitable at today’s price. In fact, average all of the new projects, and around a \$100/bbl is needed. We have a brief anomaly: a lot of shale oil on the market that is not viable at \$50, and a lot of gas associated liquids. So, I think that this is a good time to start investing.
Keeping it simple, the exchange traded energy fund symbol “XLE” is probably a good place to start. It is down 25% from last year. It’s top 10 holdings include 3 majors, 4 large independents, 2 pipeline transportation companies, and the #1 worldwide service provider. Buy it for a long-term investment, reinvest the 2%+ dividend yield, and I think that you will make money.
I guess that I can always avoid criticism by being like the geologist who claims that it was not a dry hole – we just did not drill deep enough. If the investment goes south, you just did not hold on to it long enough. But, I believe that no one can pick bottoms, so if it goes lower, I would just add to the position. And, any commitment of any significant size should normally be phased in – i.e., look to invest 1/3 now, another 1/3 in a month or so, and then the final 1/3 a month or so after that. If it goes down, you have a lower average cost and if it goes up, you will feel more comfortable with your position. So, you would really want it to go up.

• ChiefEngineer says:

Thanks Clueless for your thoughtful response,

I’m on board with everything your saying. I’m not a big fan of ETF’s but have put XLE on my watch list. It’s a nice diversified buy into the energy sector. Held myself back today from the Nordstrom sale today at the exchange. I don’t think this pull back is over.

I have a little different take on future oil use than most here at Ron’s place. I think oil demand is not down just from a slower economy but also from efficiency that is being worked into the system from long term higher oil prices. I also think in the future there will become a lot of substitutes for oil in the transportation sector and the world is not going to collapse like doomers believe. It wouldn’t surprise me that in 2030 new vehicle mileage standards average over 100 mpg. This could lead to lower oil production at a reasonable cost to oil. Current Saudi policy seems to play well with slowing efficiencies to the market place.

Thanks again

• Nick G says:

If EVs are cheaper when oil rises above \$60, then it won’t take too long for oil companies to be caught between the vise of rising capex and falling revenues.

EVs and other alternatives will continue to get cheaper. Oil will get more expensive. This doesn’t end well for oil investors…

• ChiefEngineer says:

I agree Nick. It could work out that way. But I don’t believe \$60 oil production can satisfy \$60 demand for very long in todays world.

But, if EV’s can be cheaper than \$60 oil in 5 to 15 years. It will still take 15 more years to switch over most of the world fleet.

• Nick G says:

EVs are as cheap as \$60 oil right now.

Why wouldn’t 15 years be fast enough?

• robert wilson says:

I am driving to San Francisco tomorrow to pick up my daughter and granddaughter. Sure glad that I have a Honda Accord and not an EV.

• Nick G says:

Different folks need different things.

You’d be well served by a Chevy Volt: uses 10% as much fuel as the average U.S. car. (That’s low enough to be handled by ethanol, even if the whole US car fleet ran on it)

14. Political Economist says:

Hi Dennis, so the underlying historical data are mainly based on Laherrere’s estimates of historical discoveries. Is this understanding correct?

• Dennis Coyne says:

Hi Political Economist,

The discovery data is based on the charts that Jean Laherrere has published, I read off the charts so these are estimates. The production data is based on EIA C+C data and extra heavy(XH) oil output data from the Canadian Association of Petroleum Producers (for Canada) and Jean Laherrere’s estimates of Venezuelan XH output.

So yes you are correct.

15. Jeffrey J. Brown says:

Re: Pemex CEO (last year): We need crude oil, not condensate*

I think that the following EIA chart, which projects that US 40+ API gravity C+C liquids increased from 1.4 mbpd in 2011 to an estimated 4.2 mbpd in 2015 (an increase of 2.8 mbpd), versus a projected increase of only about 0.7 mbpd in 40 and lower API gravity crude from 2011 to 2015, really tells the tale about what’s going regarding US C+C production and inventories, especially when combined with the refinery yield chart that shows that Cat Feed + Distillates drops from about 52% at 39 API gravity to about 20% at 42 API gravity.

40 API and lower crude accounted for 75% of US C+C production in 2011, but the projection was that it would only account for 54% of US C+C production in 2015.

Note that it took about half the global rig fleet (targeting oil and gas reservoirs) just to show a projected increase of about 0.5 mbpd in quality US crude oil production (40 API gravity and lower) from 2011 to 2014.

In my opinion, US refineries are still (net) importing a lot of crude oil (about 44% of total C+C inputs), despite sky high C+C inventories, because they have to–in order to meet the full spectrum of refined petroleum product demand.

*http://uk.reuters.com/article/2014/08/28/mexico-pemex-idUKL1N0QX2TL20140828

• Jeffrey J. Brown says:

Refinery yield chart (note the substantial decline in distillate yield as the API gravity exceeds 39 API gravity):

• Watcher says:

That bad boy is just never getting old.

The Maersk E-series is now using diesel.

• Jeffrey J. Brown says:

Even if US producers were able to export unlimited amounts of condensate (over 45 API) and very light crude (about 40 to 45 API gravity), I wonder how much demand there is for it outside of the US, especially in regard to condensate.

I don’t see why refiners would want very much (Pemex said no thanks already), which, I assume, would leave the petrochemical industry and the tar sand operators as the only likely buyers of consequence, and the question is how much more light stuff they need.

• Jeffrey J. Brown says:

And a graph showing global crude oil, in terms of sulphur content and gravity (note that the gravity scale tops out at 40 API gravity):

16. jim moore says:

Long time lurker,
But i have a question for the folks here.
Will the drop in oil prices also kill natural gas production in the US?

• I don’t think so. It should reduce the number of new gas condensate wells, which will lead to eventual reductions in gas deliverability. This in turn increases gas prices. Higher gas prices encourage investment in more gas wells.

17. lexilis says:

The original post is very interesting but I think is making a serious error. Mr. Coyne defines a random variable modeled by an exponential distribution with mean value = 20 years. (= 1/k with k = 0.05). He defines the quantity m as the “probability that a discovery will become a producing reserve t years after discovery” and states that m = kexp(-kt). A reference to the Wikipedia entry is provided. The problem is that the stated equation, which is in the form of the probability density function for an exponential random variable, does not calculate a probability. The value of any continuous pdf at some given value of its argument (i.e., t) is definitely not a probability. Probabilities are found by integrating the pdf over an interval (finding the “area under the curve”). Mr. Coyne’s Figure 2 which presents an exponential pdf curve (with parameter = .05) is labeled as plot of a probability. This is just plainly false. A continuous pdf can have values greater than 1 which of course can not be a probability (e.g., see the Wikipedia plots).

Whether or not this equation is useful for modeling oil production profiles I don’t know. I do know that claiming that it calculate probabilities directly (that is, without integration) is not an example of an exponential distribution.

• Dennis Coyne says:

Hi Lexilis,

You are correct. I in fact used discrete probabilities at mid year as an approximation for the probability over the year interval.

This was intended as a simplification of the material in the Oil Conundrum.

For the Maximum Entropy Probability Distribution see

http://en.wikipedia.org/wiki/Maximum_entropy_probability_distribution

We use the case with a positive mean (which is unknown) which leads to the negative exponential probability distribution.

The mathematical justification for using a negative exponential probability distribution are covered in the Oil Conundrum pp. 57-64. See especially pp. 59-60.

Formally the probabilities are discrete at t=0.5, 1.5,…,999.5, these are used to approximate the Cumulative probability over the intervals from 0 to 1, 1 to 2, etc.

I will let those more well versed in mathematics to argue with you over the significance of such an approximation, my guess is that it is of little importance.

• A damped exponential is the maximum entropy distribution of an uncertainty in rate.

This approximation is used in all sorts of applications, including the estimate of failure rates when modeling probabilities of lifetimes of parts.

What lexilis is missing is that this is an estimate of extraction rates from an ensemble of fields where one only knows the mean. When the mean equals the standard deviation you get the MaxEnt distribution, which is the damped exponential.

• Doug Leighton says:

When you refer to “damped exponential” is this the same as damped trend exponential smoothing? If so, this is very well established forecasting method that was developed by Bob Brown eons ago (1950’s?).

• lexilis says:

“What lexilis is missing is that this is an estimate of extraction rates from an ensemble of fields where one only knows the mean. When the mean equals the standard deviation you get the MaxEnt distribution, which is the damped exponential.”

I am not missing anything. My claim is very simple. the given equation does not calculate probabilities as the OP claimed. This is not even in dispute.

• lexilis says:

I am not missing anything. My claim is very simple. the given equation does not calculate probabilities as the OP claimed. This is not even in dispute.

You can always read up on it. Similar approaches are used in biomedical applications where it is called compartmental flow.

Probability density functions are useful because they are normalized to unity so that they will conserve matter when integrated or convolved. This stuff is not even a matter of debate, it is that fundamental.

• Dennis Coyne says:

Hi Lexilis and WebHubTelescope,

I looked at this probability problem a little more closely.

The cumulative probability integral is 1-exp(-k*t), when this is integrated over yearly intervals (0 to 1, 1 to 2, etc) it gives exactly the same answer as the PDF at half year points (0.5, 1.5, etc), this can probably be shown algebraically. Possibly Webhubtelescope already knew this, but I did not, so I appreciate the question from Lexilis as I have learned something (or possibly relearned as I have forgotten a lot).

• Futilitist says:

“The original post is very interesting but I think is making a serious error…”
~lexilis MARCH 10, 2015 AT 8:27 AM

A serious argument.

“A damped exponential is the maximum entropy distribution of an uncertainty in rate….
…What lexilis is missing is…”

~WebHubTelescope MARCH 10, 2015 AT 11:23 AM

“I am not missing anything. My claim is very simple. the given equation does not calculate probabilities as the OP claimed. This is not even in dispute.”
~lexilis MARCH 10, 2015 AT 12:07 PM

A reassertion of the original good argument.

“You can always read up on it.”
~WebHubTelescope MARCH 11, 2015 AT 9:09 PM

But here is the really interesting part. Lexilis’ original question was answered by WebHubTelescope in just under 3 hours. About 44 minutes later, lexilis answered back. WebHubTelescope doesn’t respond for a very long time. In fact, he leaves the question hanging for over 33 hours! Elvis had long since left the building. Too bad. It would have been nice to see how the argument came out. Oh well.

“Hi Lexilis and WebHubTelescope,

I looked at this probability problem a little more closely.

The cumulative probability integral is 1-exp(-k*t), when this is integrated over yearly intervals…”
~Dennis Coyne MARCH 14, 2015 AT 7:56 AM

And now, 3 days later, Dennis Coyne comes back to tidy up. So much for genuine debate.

Nothing to see here, folks. Move along.

• Science doesn’t go away. It is always there. It is also not open for rhetorical debate as you seem to suggest.

The essential rule is that probabilities sum to unity. You can go a long way with this simple rule.

• Futilitist says:

“The essential rule is that probabilities sum to unity. You can go a long way with this simple rule.”

Dennis certainly proved that point. I can’t argue with that one, WebHubTelescope.

But lexilis may have been able make a good argument on the original probability question. Too bad he is gone. I guess we’ll just have to take your word for it.

18. Rune Likvern says:

Nice post, Dennis
————
For those with an interest,
I posted an update about Norwegian crude oil production (with a forecast to 2040) and reserves developments based upon Norwegian Petroleum Directorate (NPD) data as of end 2014.
http://fractionalflow.com/2015/03/10/norwegian-crude-oil-reserves-and-extraction-per-2014/

• Sam Taylor says:

Rune,

Thanks for the update. Something that has struck me recently is the difference in exploration and development on the UKCS versus in Norwegian waters. Despite both provinces having the same Geology, there has been much more action in the Nowegian sector in the last years. It really does show how much of an impact government policy can ultimately have on the oil sector. The UK sector of the north sea is in serious danger of leaving lots of oil stranded as infrastructure is dismantled, due to underinvestment over the last few years.

• Rune Likvern says:

Sam, thanks!
Some years ago Norway revised the tax structure for drilling exploration wells whereby companies that were not in a taxable position was refunded 78% (max tax rate) of the well cost after it was drilled (leveling the playing field). (There may have been other arrangements as well with the same end result).
This stimulated exploration activities. And companies drill if they have a prospect showing potential.
The result from this was several new discoveries and a higher oil price got some of these in extraction phase soon after discovery.

• Sam Taylor says:

Rune,

Yes, Norways taxation system certainly seems better suited for getting the most out of an ageing province. The government here has really hammered the O&G sector in recent years. While changes in tax codes would probably stimulate more exploration, I wonder how politically popular such a move would be in a time of government austerity, especially in an election year.

• Doug Leighton says:

Sam,

“The UK sector of the north sea is in serious danger of leaving lots of oil stranded as infrastructure is dismantled, due to underinvestment over the last few years.” Is that actually true or simply companies threatening to do so in order to exert pressure on the government for tax reductions or whatever? Maybe it’s partiality true?

• Sam Taylor says:

Doug,

We’ve lots of old rusting hulks sat out there. Once the decision is made to start decomissioing them, any nearby prospects that could be linked up to existing infrastructure will potentially become unviable. I believe some projects are might be in danger of having the ends of their lives brought forward due to the price drop. This was something that was brought up by a few speakers at the PETEX last year, which is largely an industry event, so I think there’s definitely some truth in it.

• Rune Likvern says:

Sam,
The Norwegian Petroleum Directorate (NPD) has repeatedly stressed the term “time critical resources” and been very active towards owners of such. “Time critical resources” is discoveries/prospects that is evaluated to be profitable as long these may use (lease) process and utilities from existing installations while these still are economic (profitable) to run. There are several examples of developments that happened because of this awareness.

If nearby host facilities get shut down/decommissioned, for whatever reason, these “time critical resources” becomes opportunity lost. It is all about good husbandry of a country’s endowment of natural resources.

The oil price is a different story.

• It´s true, and they are trying to get a tax break. I´ve worked in operations overseas where we renegotiated the tax deal constantly. If prices went up the government ratcheted the take up, if they went down we whined and asked for a tax cut. We always reached an agreement, and we have always stuck around.

Norway, and amazingly Angola are countries which manage their resources a lot smarter. Angola even has a Production Sharing Contract model which changes taxes on a quarterly basis. For example, as far as Angola is concerned the share of production and reserves to be assigned to the foreign investors is now increasing. This means the companies would be entitled to book more reserves and claim more net production share coming out of Angola.

Norway is a bit different, they micro manage things via the directorate. The UK, as far as I can see, is a mess. The same applies to the USA. These countries use really outdated oil industry management systems.

19. Watcher says:

“Effectively, the rock is the storage,” said Troy Cook, an analyst with the Energy Information Administration in Washington.

pssssssst. What was that about supply and demand?

20. Bryan says:

I’ve been trading global fiat currencies for a living for about ten years. So my interest in oil and peak oil pertain to how oil will effect global currency markets as a whole and also how oil and peak oil will effect individual currencies. So the more i can learn about oil the better. One thing i do know very well is how to read a chart in order to figure out where price is going. Oil is in a consolidation pattern between the low at 43.58 an the current bounce off the low high at 54.24. A break above 54.24 would be an attempted at an oil price rebound. A break below 43.58 would suggest prices have further to fall. Here is a chart of light sweet crude futures. http://tos.mx/UADs3F Eventually oil will break out of this zone in one direction or the other. If this were a currency pair instead of oil futures i’d buy a break above 54.24 or wait for a lower low below 43.58 and buy after the lower low is made and the consolidation period after the lower low comes to a end. Just as long as that consolidation period ended in a break above that consolidation zone. Otherwise i’d wait for an even lower low.

21. Allan H says:

Dennis C
Considering the range of variance of the real data, it roughly appears that we may be able to determine the validity of your model by 2020. The test being when a continued plateau or rise of real production versus your predicted curve will have produced a difference outside of the normal range of production variations.
Have you developed a confidence limit for comparison or range of deviation that will allow fit testing against future real world data?
Also, when you say crude plus condensate, does that include gas well condensate?

• Dennis Coyne says:

Hi Allan H,

This is not really a forecast, it is a scenario based on a set of assumptions about future extraction rates and an assumed URR of 2700 Gb. I think this scenario is likely to underestimate C+C output because in my view a better estimate of C+C URR is 3100 Gb. There is no way to know what future extraction rates will be and the best I could do would be to produce a low and high scenario for future extraction rates, with reality possibly falling between the high and low estimate. Crude plus condensate includes whatever the EIA uses in its definition of C+C, my understanding is that gas well condensate is included.

22. Ronald Walter says:

Danger, Will Robinson! Danger!

We’re lost in space, that’s for sure.

My paternal grandmother never knew indoor plumbing, she had a well and a cistern. She had electricity for lights and some power, but she used a treadle sewing machine and had a cook stove for cooking and heat. An outhouse worked just fine. My maternal grandfather and grandmother never had indoor plumbing. They had electricity with push button switches, a windmill next to the barn that pumped water from the well, and a cook stove. One of my uncles who farmed didn’t have indoor plumbing until 1972. I remember living in a house with no bathroom during the summer months one summer while my Dad worked the tie gang on the railroad and the rest of the family traveled along for the summer adventure. Had to use an outhouse, no other choice. Rode the sweaty back of a workhorse that pulled the hay wagon, my pants were wet with horse sweat. There’s no place like home, be it ever so humble.

It won’t take much of an effort to return to a lifestyle that once was and I once knew because it was there in front of me. A windmill for pumping water, some land to produce food, and, if it is completely necessary, I’ll cut sod, dig a hole four feet deep for a root cellar and build a sod house over it. It won’t take a leap of faith.

It’ll be a carbon sink, a net gain, no loss, the path to salvation, which is as straight and narrow as a laser’s edge.

Humble beginnings to humble beginnings. Started without a drop of oil, can’t be that difficult to return to what once was, that’s where it all began. To be a hick from the sticks feels gud.

Alfalfa’s roots reach a depth of eighteen feet, a very drought resistant plant, hard to stop and not that likely to die over a period of dry weather/climate. Clover’s roots reach six feet, not as deep, but the grasshopper’s like clover better than alfalfa, when the grasshoppers start eating clover, the clover doesn’t have a single leaf left on the plant, you wouldn’t know it is clover if you didn’t know it was there before it ended up looking like a plant of sticks.

If there ever was an insect that represented the firm Engulf and Devour, Inc., it would be the grasshopper. They have voracious appetites, each and every one of them. Then all of a sudden, seasons change, cold weather rolls around and the grasshoppers are gone for a while. From millions to nary a grasshopper to be seen for hundreds of miles, it’s too cold. It’s like they fall off a cliff only to make a glorious, triumphant return.

• Futilitist says:

Hi Ronald.

“If there ever was an insect that represented the firm Engulf and Devour, Inc., it would be the grasshopper. They have voracious appetites, each and every one of them. Then all of a sudden, seasons change, cold weather rolls around and the grasshoppers are gone for a while. From millions to nary a grasshopper to be seen for hundreds of miles, it’s too cold. It’s like they fall off a cliff only to make a glorious, triumphant return.”

Reg Morrison refers to grasshoppers to as a ‘plague species’. They are specially evolved to “fall off a cliff only to make a glorious, triumphant return”, as you say. Grasshoppers have done this for a very long time, and so they are very good at it. We will not be so good at it.

Some people like to refer to humans as a ‘plague species’ in reference to our destructive capability. This is not correct. Humans are large mammals. We cannot do what grasshoppers do because we simply cannot breed as prodigiously. We can’t just wait around for 7 years underground and emerge in a swarm. We are just not evolved to fall and rise. We are evolved to rise until we can’t. Thus our die-off will be a one off event.

“When collapse does come, and it will, the destruction of the natural world will get worse, far worse. We will eat the songbirds out of the trees. We will cut down the last tree for heat and cooking fuel. We will leave the earth a virtual desert.”
~Ron Patterson

• Fred Magyar says:

Reg Morrison refers to grasshoppers to as a ‘plague species’

One person’s pest is another one’s delicacy! Or more like the biblical Manna from heaven… Locusts or grasshoppers are 60% protein kinda like flying shrimp. So instead of spraying them with pesticides get even and eat the little buggers fer cryin out loud!

http://www.bbc.com/news/magazine-21847517

Locust is the only insect which is considered kosher. Specific extracts in the Torah state that four types of desert locust – the red, the yellow, the spotted grey, and the white – can be eaten.

As with fish, there are no rules surrounding their ritual slaughter, making them a particularly versatile ingredient for culinary connoisseurs, like chef Moshe Basson, founder and owner of the famous Eucalyptus restaurant in Jerusalem, and a specialist in reviving ancient Biblical foods.

Down in Australia they make locust pizza, Goes great with beer!

• Futilitist says:

Hi Fred.

A great many things can be eaten that people are unaware of. When I went off to the wilderness college to learn Paleolithic living skills, I did a lot of experimentation (some of it outside the curriculum). I tried earthworms, which are not tasty. I ate whole lot of garter snakes, which I got very good at catching. They are easy to clean and delicious. I even pioneered a food source that, as far as I can tell at least on the internet, may be largely unknown: Bull frog tadpoles.

In Washington State bull frogs are considered an invasive species, and mature bull frog hunting is encouraged (it is about the only unrestricted thing you can hunt there). Bull frog tadpole hunting is also not restricted, since nobody ever thought of such a thing. They are very easy to catch and easy to prepare. And they taste like fillet of sole, only better!

I designed an enclosure on a small creek to experiment with farming them. I never finished it, but I’m sure it would work.

And don’t forget all the edible plants in a forest. Most people walk right by perfectly good food and never even know it. You also have to know what things not to eat.

What I really learned in my time in the wild was that it was almost impossible to learn all you really need to know to live in the wild. It takes several lifetimes to learn to re-wild. You really have to be born in a working wild culture, so you can grow up learning all the right stuff. Good luck to any modern folk who try. But they will eventually have to. It will be their only chance for survival.

• wimbi says:

Grasshoppers are good to eat,and easy to catch. Yum!

Ask any chicken. As a kid, I loved the chore of herding the chickens out into the field to gorge on grasshoppers and then back to the barn to avoid the coons, who liked to eat grasshoppers preprocessed by chicken, just as we did.

• Futilitist says:

When Ronald brought this up, he was comparing humans to grasshoppers in what I correctly saw as a false analogy. He said that grasshoppers can bounce back from a die-off and, therefore, so can we! 🙂 This is clearly not true, so I pointed this out. 🙁

Now we are talking about how delicious grasshoppers are. 🙂

Okay.

• wimbi says:

Point is that if we just learn to eat whatever is there in swarms all around us, we won’t be as likely to get into a dieoff in the first place.

Bears rip logs apart to get at the grubs therein, presumably with a net positive EROEI. So train bears to live like factory workers.

Eating cattle is stupid if we can get tadpoles so much easier and they taste better. Bull frog spearing was great fun when I was a kid.

Frog is really good to eat, ask any big blacksnake.

Lots of people eat rats. Why not?

And there’s a big problem with pythons in Fla, eating all the small mammals, so why not we eat python? Think of the number of delicious big steaks in a 15 ft snake.

• Fred Magyar says:

Hey Wimbi,

Here in Florida we also have a problem with invasive Iguanas… also known as Chicken of the Trees in other parts of the world, they even lay nice big eggs.

How about an order of Iguana McNuggets? >;-)

Cheers!
Fred

• Bob Nickson says:

As Joel Salatin has demonstrated at Polyface Farms, made famous by Michael Pollan in the Omnivores Dillema, grazing cattle increase grassland productivity (pulsing the meadow is Salatin’s term).

John Wick, a California cattle rancher, is now demonstrating that the principle can be used to sequester atmospheric carbon into soils, rebuilding them. See http://craftsmanship.net/the-carbon-gatherer/

From the article:

“His protocol has now been approved by the American Carbon Registry for use on the voluntary carbon trading market. It also just recently got the nod from the California Air Pollution Control Officers Association, which means that California counties can offer emitters the ability to purchase credits from ranchers using the system.”

From the same article, “Rattan Lal, distinguished professor of soil science at Ohio State University” states:

“We could put a hundred gigatons [of carbon] into the soil over 25 to 50 years and another hundred gigatons into the trees and forests, […] so if we did trees and soil, maybe in about 50 years, we could take out about 50 parts per million of CO2.”

So, I don’t mind eating cattle, especially if John Wick produced it.

There are a number of other excellent articles at craftsmanship.net that may be enjoyed by those not addicted to disasturbating to doomer porn.

:^)

• ezrydermike says:

cool.

I recommend watching the Earth A New Wild series recently broadcast on PBS.

http://www.pbs.org/earth-a-new-wild/home/

One episode was on Plains and it featured the J Bar L ranch in Montana.

Another look at the ranch

http://www.nature.org/new-wild/plains/hope-on-the-range.xml

• Futilitist says:

“There are a number of other excellent articles at craftsmanship.net that may be enjoyed by those not addicted to disasturbating to doomer porn.”

It would be a shame if a fine site like this one were to fall victim to over representing “doomer porn”, and thus become a sticky “disasterbation” site. I wanted to see if that was a real danger, so I made little a tally to find out:

🙁 = Doomer statement or message
🙂 = Sunshine statement or message

Here is a brief synopsis of the game so far:

🙂 Grasshoppers and humans are both voracious. Humans can bounce back from die-off like bugs do!

🙁 Yes to the first part and no to the second. Grasshoppers are a plague species. Humans are not.

🙂 But grasshoppers are delicious! And so are locusts!

🙁 Yes, many things can be eaten. But it takes time to learn what to eat and what not to eat. It is not as easy to just switch to eating bugs as it might first appear. And after collapse, you won’t have any choice but to eat bugs.

🙂 Grasshoppers are good! Chickens like grasshoppers and coons like chickens!

🙁 Um, it feels like we may have gotten a little off the subject.

🙂 Point is that if we just learn to eat whatever is there, we won’t be as likely to get into a dieoff in the first place. Why not eat pythons?

🙂 Iguana McNuggets, anyone?

🙂 Grazing cattle increase grassland productivity! I don’t mind eating cattle.

🙂 The Earth A New Wild series, recently broadcast on PBS, featured the J Bar L ranch in Montana!
—————-

And the final score is:

🙁 🙁 🙁
🙂 🙂 🙂 🙂 🙂 🙂 🙂

Sunshine wins by 7-3! So, it would seem there is not too much real danger of being overwhelmed with “doomer porn” around here. What a relief. 😉

• Lloyd says:

Hi Futilitist.
You forgot the Tyson rule, which he proved in his fight with Evander Holyfield:

🙂 Humans are delicious!

Once word gets out, the problem solves itself.

-Lloyd

• ezrydermike says:

as long as there is enough chianti

• Futilitist says:

Hey Lloyd.

🙂 “Humans are delicious!”

Once word gets out, the problem solves itself.

Ah, the other other white meat.

I guess we really are what we eat…

…or soon enough will be. 🙂

• clueless says:

Started without a drop of oil, can’t be that difficult to return to what once was, that’s where it all began.
Ron –
Most people could not return to a pre-1865 way of living. And, if there had been 300 million people in the US in 1865, most of them would not have made it either.

23. Watcher says:

Well it’s a fine how do ya do when you announce you want to print over 1 trillion Euros by September next year and discover the present owners of the bonds you want to buy (to achieve the printing) won’t sell. That is almost, but not quite, funny. How could Draghi’s staff not know? Down goes the Euro.

Reminder. Collapse isn’t collapse until you get 10,000 people in major cities dying per day of starvation. That’s a right and proper collapse. A stock price falling is not collapse. Bond yield falling is not collapse. If morgues don’t fill, there is no collapse.

Don’t expect it to happen from anything money related. Remember back to Bernanke’s famous 60 Minutes interview . . . “Sir, you know people are saying you are printing money.” “I have heard that. I don’t know why they say it. I am not printing money. I’m just buying bonds.” The interviewer, it is said, actually did ask “where did the money come from you used to buy the bonds” but it was yanked per editorial imperative and all that. tra la tra la

That’s why it won’t be money related. If someone’s debt holdings threaten to have 10,000 die in a city of starvation, that person’s debt holdings will be expunged and if he complains, he’ll also be expunged. It’s the obvious simple solution.

Only geology takes it all down. Not money. Soon.

• Bryan says:

ECB will end up owning bonds with negative yields since all those bond holders that bought when yields were much higher can’t and won’t sell their bonds. ECB can pay any price it wants to purchase a bond. So in theory it could just pay a trillion dollars for whatever amount of bonds are available to purchase. Your 100% correct about geology taking down the system. And from that point of view it doesn’t matter what the ECB buys, it doesn’t matter what any of the Central Banks do. Only question is where it manifest itself first and who will fall the farthest. Those countries with limited natural resources and countries with very large populations are going first. Then those who do have natural resources and can’t defend them. China and India have very large populations. Japan and some European countries are very limited in natural resources. Some middle eastern, South American, and African countries won’t be able to keep control of their oil fields.

• Watcher says:

The ramifications of ripping away the facade of money normalcy should not be underestimated. Remember about 4 weeks ago how Russia was going to be destroyed because the ruble was falling?

The ruble falling against the USD because oil price is down makes no one in Moscow starve. No one at all. They have their own croplands. They have a grain surplus and export it, apparently recovering from a drought about 2012: (http://www.world-grain.com/Departments/Country%20Focus/Country%20Focus%20Home/Focus%20on%20Russia.aspx?cck=1)

There ain’t gonna be any starving people in Moscow’s population of 11 million. They got the food. They got the oil to move it. Their budget turns negative from surplus? Since when did that become a collapse criterion? The US will run \$500B worth of deficit this year.

When production falls, price doesn’t matter. Again, the difference between demand and consumption. Demand all you want, if it ain’t there, you can’t consume it.

Raise price and get production, you think? Why? If people are starving and you need the oil, you will print whatever money you have to print to get the oil. blah blah, we’ve covered this.

Bottom line, the future is not bright. It’s deathly dark, and getting darker.

• Bryan says:

The US can always invade Canada. Russia has to worry about their southern neighbors invading them as well. At some point any alliance will fall. If you have natural resource and food you will be a target.

• AlexS says:

And if you have natural resource, food and nukes?

• Bryan says:

China is already a wasteland so a few nuked Chinese cities isn’t much different than current reality. They’ve invaded Russia in the past if they ever do it again it will be not only to take their resources and food but to take the land as well. So unless Russia is willing to nuke their on soil the nuke issue might not be a issue. A few hundred million Chinese against a few million Russians. If i’m China i like my odds. Russia is not the modern day Spartans.

• AlexS says:

It seems that you don’t know the history. China has never invaded Russian territory, except for a brief episode in late 60s when several thousands of Mao’s soldiers tried to take a small island on the Amur river. They were all eliminated in few hours.
You should also know that Russian oil and gas fields are mostly located 4-5 thousand kilometers from China’s border. As regards land, this is mostly permafrost.
Russia has enough nukes (several hundreds) to keep any potential invader far from its borders.
Finally, the Chinese are smart enough to have Russia as an ally

• Bryan says:

At some point oil and gas producing countries like Russia will figure out their better off hoarding their oil and gas for their own future use instead of exporting it. Global economy might become local economy. Russia has everything it needs and could actual cut it self off from the rest of the world. China on the other hand can’t cut itself off to the rest of the world, not without there being a serious decline in their population. When China becomes desperate enough and they will become desperate enough when oil scarcity really starts setting in they will turn on Russia. Nukes or no nukes Russia will be targeted for their oil and gas and it wont just be the Chinese.

• Doug Leighton says:

Bryan,

Actually, Russia has thrown open its doors to Chinese investment in its energy sector as sanctions put ventures with Western companies on hold. At the recent APEC meeting, Rosneft announced an agreement to sell a stake in its prized Vankor oilfield to CNPC. This field, which produces about 450,000 barrels of low-sulphur crude per day, has been the main source of Russian oil deliveries to China through the East Siberian-Pacific Ocean pipeline. Such resources had been considered off-limits to investment, particularly from China, but sanctions on Rosneft are changing this. Nobody could get access to that or any of what Russia defines as strategic oil assets before, so, they’re clearly moving closer together in an energy sense. Sanctions on Western technology for LNG production in Russia may also affect its energy exports to China with Gazprom threatening to scrap plans to develop LNG for the international market in the Russian East (liquefaction plant at Vladivostok) and instead build a second eastern export pipeline to China instead. This talk of nukes is nonsense. I doubt Russia and China will ever be allies, as in friends, but both are very pragmatic in business matters.

• Bryan says:

I’m well aware of current Russian/Chinese relations. Peak oil and the oil scarcity that will come after will change the current relationship and arrangements made by many of countries. China is currently opening it’s arms to Russia, is really just a continuation of BAU. When oil scarcity sets in BAU and any agreement made during BAU are null. Stuff like carbon reduction won’t exist either after BAU comes to an end . Countries will burn whatever they got or can get.

• Aleksey says:

Russia: According to the September 2014 New START numbers, Russia has 1,643 strategic warheads deployed on 528 ICBMs, SLBMs, and strategic bombers. The Federation of American Scientists estimates Russia has several thousand nondeployed strategic warheads and approximately 2,000 tactical nuclear warheads. An additional 3,700 are awaiting dismantlement.

France: 290 deployed warheads.

United Kingdom: About 120 strategic warheads, of which no more than 40 are deployed at sea at any given time. The total stockpile is up to 225 weapons.

United States: According to the September 2014 New START declaration, the United States has 1,642 strategic nuclear warheads deployed on 794 ICBMs, SLBMs, and strategic bombers. The Federation of American Scientists estimates that the United States’ nondeployed strategic arsenal is approximately 2,800 warheads and the U.S. tactical nuclear arsenal numbers 500 warheads. In total, the U.S. has about 4,800 nuclear warheads, including tactical, strategic, and nondeployed weapons. Additional warheads are retired and await dismantlement.

http://www.armscontrol.org/factsheets/Nuclearweaponswhohaswhat

All in all, Russia is on even with the US wrt strategic nukes. As for tactical nukes, looks like Russia has more than the rest of the world combined. Surely Russia won’t use strategic nukes against China or any other neighbour. Those are spared for the US. But there are several thousand of tactical nukes just waiting to be dismantled. I doubt any volunteers will go ahead and offer their territory as a garbage lot for them.

• Watcher says:

4+ million bpd chug along the Chinese east coast northward to Japan all the time. A lot easier to get those barrels than Russia’s.

• Ronald Walter says:
• Strummer says:

“Those countries with limited natural resources and countries with very large populations are going first.”

I’d add to this another factor, useful productive exports. The global economy is not going to collapse overnight, and as long as a country produces lots of useful stuff other countries need (not just want, but truly need), it should be fine. Example Germany or France. On the other hand countries with limited natural resources, very large populations, and no viable exports are truly screwed. Example Ukraine.

• Caelan MacIntyre says:
24. joec says:

“Production from three of the four largest shale oil plays in the United States will fall next month, the U.S. Energy Information Administration (EIA) says.” – http://www.reuters.com/article/2015/03/10/usa-shale-opec-kemp-idUKL5N0WC36Y20150310

25. John B says:

Hi Dennis,

Your graph shows a declining World C+C prior to 2015. Since we know that didn’t happen, does this not prove URR is > 2.7 Trillion?

Also, we’ve seen declining production forecasts before that never happened.

Hubbert 1974: http://www.hubbertpeak.com/hubbert/natgeog.htm

The Oil Drum 2007: http://i129.photobucket.com/albums/p237/1ace11/WorldCClife200704.jpg

• Dennis Coyne says:

Hi JohnB,

The data is annual data from the EIA, 2014 is an estimate based on the first 9 months of the year. The peak is 2014 on the chart. An easier to read chart (data the same as the revised model at the end of the post) is below. Note also that this model is my “low case” of World C+C URR, my best guess is 400 Gb higher than this (3100 Gb). I believe this scenario underestimates future output, I will cover other cases in a future post.

Also note that the peak assumed by Hubbert was much higher than actual production in 1995, he expected output would peak at about 100 Mb/d in 1995, when production was only about 62 Mb/d in that year, part of the reason he was wrong is because output did not rise as fast as he predicted.

The forecasts by Ace at the Oil Drum were not very good.

Oil will peak, but exactly when in unknown, my best guess is 2018, with a possibility of 2020, a plateau (+/- 1 Mb/d) between 2014 and 2020 is not that far fetched, decline will be obvious by 2023 at the latest.

Correction on Hubbert’s 1974 article. In 1973 there was about 20 Gb/year produced and he estimated double that amount by 1995 (about 40 Gb/year). Actual output was about 23 Gb/year in 1995 and is currently about 28 Gb/year, so Hubbert was too optimistic about peak levels of output and assumed the exponential trend from 1960 to 1973 would continue through 1990 or so. His URR estimate was 2000 Gb, similar to Jean Laherrere’s 2200 Gb estimate for C+C less extra heavy oil.

26. islandboy says:

And now for a tiny ray of sunshine!

U.S. installs 6.2 GW of solar PV in 2014, up 30% over 2013

“Newly installed solar photovoltaic (PV) capacity for year reached a record 6,201 megawatts* (MW), growing 30 percent over 2013’s total. An additional 767 MW of concentrating solar power (CSP) came on-line in the same period.

Solar accounted for 32 percent of the nation’s new generating capacity in 2014, beating out both wind energy and coal for the second year in a row. Only natural gas constituted a greater share of new generating capacity.”

Before the comments start rolling in, let me be the first to admit that adding more “capacity” does not add up to much when you are adding solar PV with a capacity factor of 10-20% as opposed to baseload fossil fuels with >80% capacity factor. I’m assuming capacity is measured in MW or GW since the actual energy output can only be estimated before or measured after but a GW of nameplate solar is a GW. This is where it gets interesting.

US Solar Generation Doubled in 2014, Renewable Output Grew 11%

” New federal statistics out this week have shed more light on solar and wind energy’s emerging role in keeping the country’s lights on. According to the U.S. Energy Information Administration, 2014 saw non-hydro renewable energy generation increase by 11 percent over the previous year — and solar power led the charge in growth, if not in overall share of U.S. electricity supply.

According to EIA’s new Electric Power Monthly report (PDF), solar photovoltaic systems generated 15,874 gigawatt-hours of power last year, up from 8,121 gigawatt-hours in 2013. Solar thermal generation grew even faster, if from a smaller base, from 915 gigawatt-hours in 2013 to 2,447 gigawatt-hours in 2014.”

So, while “capacity” grew by 50% from 12GW to 18GW, it’s contribution doubled from a little over 8TWh to just under 16TWh. This suggests that a substantial portion of the 6GW added in 2014 is in locations that allow capacity factors in excess of 15% in order to generate the added 8TWh.

I put the data from the EIA’s new Electric Power Monthly in a spreadsheet and did a chart for annual electricity generation as a percentage of total by source and the result shows non hydro renewables (Renewables in the legend) increasing steadily from just over 2% in 2004 to a little under 7% in 2014. Just as a thought excersise I did a tiny spreadsheet with the percenrage contribution from non hydro renewables doubling every 6 years and here are the results.

year – percentage contribution of non hydro renewables
2004 – 2
2010 – 4
2016 – 8
2022 – 16
2028 – 32
2034 – 64
2040 – 128

Hence my question, is it possible that every day collapse is avoided brings us closer to the day a catastrophic collapse might be avoided? Lookig at the above table, that nutty professor from Stanford, Tony Seba, does not seem al that crazy, especially sincee he expects the growth of solar PV to accelerate!

Alan from the islands

• John B says:

The answer is YES!

• Find the magic cheap battery and then you can dream on.

• wimbi says:

Magic cheap battery. Compressed air.

Don’t bother to tell me it won’t work. I am doing it right here and right now and will find out for myself, as usual. Then I will tell you.

• Compressed air isn’t the cheap magic battery. It’s too expensive. Since you are into gadgets, look into pumped storage, but use a heavy brine. The optimum design includes a top storage tank about 500 meters above the bottom catch tank. Use a brine 15 % denser than fresh water. The key is to get economies of scale. A one million cubic meter reservoir works well. But don’t forget your tanks or reservoirs have to have impermeable walls.

• wimbi says:

Fernando. Yep, I’m pretty well acquainted with elementary newtonian physics. You say salty water? Salty heavy water better?

But, I don’t mess with stuff I can’t do myself, here, on a domestic scale.

I don’t bother with sweeping declarations on the fate of humanity, global collapse and all that- way, way too many equally likely possibilities. And too many kinds of people. My vote, unfounded, is for the python/iguana/tadpole types.

Compressed air I know about. After all, my grad degree was in what is now called “rocket science”.

I am thinking of the solar compressed air as the first component of a standard gas turbine. You take that air, run it thru any sort of heater, and then thru the standard turbine. That turbine then puts out all it’s power to an alternator instead of having to put half or more of it into a compressor to get the compressed air now supplied by all that excess solar.

I am thinking of what I need to store, which is not much, adding to a few kW-hr/day at a low rate.

And, yes, I know small turbines have lousy efficiency. But, simpler than piston expander.

Anyhow, I’m not hurting anyone but myself by burning up cash and time on this game which I could have expended on golf to greater purpose.

• Check the thermodynamic efficiency of running water up hill using a piston pump, then driving a generator using a water turbine. The denser water is just a trick I´m suggesting because you´ll get much higher head from a given elevation, and the water viscosity doesn´t change much. Plus if you add salt to the water you get a brine that´s not as easy to freeze. The trick is not to saturate it. It´s just an intellectual exercise, and I´m not sure you have a hill with a very steep cliff nearby. I think that compressed air system would work much better if you had a salt cavern and could store air at really high pressure in a huge volume. The economies of scale would tip it over and make it feasible (I think).

• wimbi says:

Hey Fernando, what I was trying to say is
I KNOW ALL THAT. You don’t need to tell me any of it.

On the other hand, I suddenly realize that there may be people here who DON’T know all that, so, I take it back, your remark is perfectly sane education for folks who need it.

Water is fine if the situation is right. I played around with water storage, and where I am, and with others also having their say from different perspectives, the situation for water isn’t right.

We all liked compressed air. Lots of uses, and a dead pipeline segment for cheap storage.

Lots of dead pipelines around here- the ff locust swarm has long since passed thru, leaving dead stalks all over the place. What we are getting here now is just the poop from other pots.

• John B says:
• not clever says:

We all dream, even hard nosed engineers. If you piss on all the dreamers, what does the world look like then?

• Allan H says:

Magic batteries? If Magic = Liquid Metal then it’s a go. No need for magic, just keep making the new ideas better.

Plus, there is a new magical idea out there. Use less.

• Dennis Coyne says:

Hi Fernando,

Or connect widely dispersed wind and solar together over the grid, with excess capacity built into the system and very little backup by batteries, vehicle to grid, fuel cells, and spinning reserve (natural gas) is needed. Also demand management and peak power pricing will help reduce demand when output is low.

The problem is much more easily solved than geoengineering, and far less risky.

• Bob Nickson says:

Nissan has signed an agreement for a car to grid (C2G) services pilot in Madrid.

There are approximately 130,000 Leafs globally as of January 2015 (30,000 alone in 2014). That is 3.2 GWh’s of storage capacity. Granted, only a percentage of the EV fleet will be available at any given time for load leveling services, but as the EV fleet grows so will the utility and capacity of C2G services. Compensation to car owners by utilities for those services may help to subsidize the cost of the car.

I could run my house for four average days with the Leaf battery, and for 14 days with a Tesla P85.

It will be interesting to see what the initial price is for Tesla’s home storage batteries that will reportedly be on the market within 6 months will be. They will be 5kWh and 10kWh systems for residential application. The real action likely won’t hit until the Giga-factory begins production in 2017 however.

• Nick G says:

Total US fossil fuel generation capacity: 1,150GW

Average FF output: 350GW

Average FF capacity factor: 30%

• Political Economist says:

Alan, using your data, the US had 18 GW of solar PV capacity as of 2014. If 18 GW operates with 100% capacity, it can generate 18 GW * 8760 hours = 157.68 TWH.

Also according to your data, US solar PV generation in 2014 was 15.874 TWH. So the observed capacity utilization rate of US solar PV was 15.874/157.68 = 10.1%

According to latest EIA projections:
http://www.eia.gov/todayinenergy/detail.cfm?id=20292

Only 2.2 GW of solar capacity will be installed in 2015

• John B says:

That’s utility Solar. I doubt if the EIA could project residential and commercial installations accurately.

• Political Economist says:

Good point.

• islandboy says:

First, it’s not MY data. My source is Green Tech Media who cite GTM Research and the Solar Energy Industry Association (SEIA)’ The data for the graph came from the EIA’s Electric Power Monthly, http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_1_01

Secondly I was trying very hard to make the point that the capacity factor of much of the new added capacity would have to be more than 15%, in order for a 50% increase in capacity to produce a doubling of the energy produced (suggests that a substantial portion of the 6GW added in 2014 is in locations that allow capacity factors in excess of 15% in order to generate the added 8TWh.)

Thirdly, the EIA is EXTREMELY conservative with their estimates for renewable energy to the point that I’m convinced that the people at the EIA don’t accept the growth figures for renewables, solar in particular. Case in point, from the first article above:

“The U.S. utility-scale segment broke the GW mark in 2011 and has since grown by nearly 1 GW annually. In 2014, 3.9 GW of utility-scale PV projects came on-line, with another 14 GW of projects currently under contract.”

and

“GTM Research forecasts the U.S. PV market to grow 31 percent in 2015. The utility segment is expected to account for 59 percent of the forecasted 8.1 GW of PV.”

Let’s see, 59% of 8.1 GW is 4.78 GW. So according to GTM Research, the utility sector alone is going to install more than twice 2.2 GW. There is no way only 2.2 GW of solar PV is going to be installed in 2015. It may even be possible that more than 2.2 GW gets installed in the first half of 2015. We will see.

I do not want to be seen as a cheerleader for solar PV but, I do want to point out how remarkable the recent growth in PV capacity has been, especially since it is in the US of all places.

It seems that despite your pointing out how bad an investment PV is, there is a significant pool of capital that disagrees with you. Would you care to show us the flaws in the reasoning of those currently investing in PV (in the US)? I am trying to reconcile your analysis of the relative merits of PV and fossil fuels with recent growth trends in PV. Something does not compute.

Alan from the islands

• Political Economist says:

I doubt that much of the newly installed solar PV has greater than 15% capacity utilization rate. That would imply incredibly low capacity utilization rate for installed capacity before 2014. (8 / (12*8.76) = 7.6%)

Another possibility is that the capacity installed before 2014 was not connected or was not fully put in operation. As some of them began to operate in 2014, it led to a disproportionate increase in output.

Some data mismatch is likely to exist when capacity comes from one source and generation comes from the other source. Let’s wait for BP or EIA provides both the capacity data and the generation (consumption) data for 2014

• Dennis Coyne says:

Hi Political Economist,

You are correct that not all of the capacity installed in any year was producing for the entire year, probably the best guess is to assume all capacity installed in year x only produced for 6 months.

So I agree that the doubling of output is probably due to the extra output from the previous year’s PV additions. The capacity factor is not likely 15%, probably 11% would be a better guess. A lot depends on where the capacity was added as insolation varies from place to place.

• islandboy says:

A lot certainly depends on where the capacity was added and I put it to you that the vast majority of the new capacity was installed in the desert southwest. If you look at the FIGURE: U.S. PV Installations by State and Market Segment, 2014 from the story at

you will see that the lions share of new capacity in California and Nevada was utility-scale while almost half of that of Arizona was utility-scale. The following page ranks states in terms of new capacity additions for 2014.

http://www.seia.org/research-resources/2014-top-10-solar-states

From the infographic. California, Nevada and Arizona ranked first, third and fifth with 4,316MW, 393MW and 249MW respectively. Just a rough estimate based on the two charts would put utility-scale about 3000+390+120=3500MW. The utility players are hard-nosed businesses and are going to look for locations that will give them the best ROI. From the solar insolation maps for the US many areas of the three states in question have values exceeding 7kWh/m2/day and in some areas approach 9kWh/m2/day. If we take the lower limit, each installed kW will generate 7kWh/day. The output if the systems were able to produce at maximum for 24 hours would be 24 kWh giving utility-scale installations in these three states a potential capacity factor of up to 700/24=29%.

So if the 3500MW utility-scale PV has been set up to maximise ROI it should be targeting an output of 8760x3500x0.29=8.94TWh. The added capacity for 2014 only added roughly 8TWh so it appears that they fell short. Not hard to figure out why. They would have to have used two axis or at least single axis tracking to achieve the maximum production and that would probably have had too adverse an effect on the ROI.

The good news is that there are miles and miles of space still available in the southwestern US. It will be a very long time before space to put these utility-scale plants becomes an issue.

Alan from the islands

• islandboy says:

PE and DC, You are both right about the newly installed capacity for 2014 not all producing from the beginning of the year, so I extracted the data for Solar PV and Solar Thermal from the data set Table 1.1.A. Net Generation from Renewable Sources: Total (All Sectors), 2004-December 2014 at the EIA’s Electric Power Monthly web page. A chart showing the data follows.

Alan from the islands

• What seems to happen is called subsidies via the feed in tariff, reversed metering, etc. Google adds gives me adds to invest in solar power, in Spanish. They offer guaranteed 7 % returns and so on. But given the cost and the low utilization rate, the answer lies in subsidies. And those subsidies are a business risk. The risk lies in government inability to put the squeeze on end users via higher tariffs, or the tax payer via taxes.

Thus what we see is (I think) a growing movement by companies engaged in the solar power business, which seems more and more like a racket (similar to the ethanol from corn or the wood chips exported to the UK so they can burn “renewable fuel”). A lot of what I read is bullshit. And I do read a lot (probably the reason why Google ads insists on giving me solar power ads).

• Fred Magyar says:

A lot of what I read is bullshit

Yep, case in point!

Let’s end the fossil fuel subsidies and get on a level playing field shall we

http://www.bloomberg.com/news/articles/2014-11-12/fossil-fuels-with-550-billion-in-subsidy-hurt-renewables

• SP says:

Not BS

• THis is typical of the baloney we read. Those subsidies are found in the Middle East and oil rich countries. Some countries, for example Indonesia and Pakistan, subsidize fossil fuels to the general population. The problem I see with this type of comment is the way it´s distorted and information is held back, to make believe the fossil fuel industry is getting subsidies in say USA and Europe. I´ve come to expect nearly zero when it comes to these articles and posts. They have no credibility precisely because they only provide partial information, and in some cases they even lie.

• Caelan MacIntyre says:

“A national oil company (NOC) is an oil company fully or in the majority owned by a national government. According to the World Bank, NOCs accounted for 75% global oil production and controlled 90% of proven oil reserves in 2010.

Due to their increasing dominance over global reserves, the importance of NOCs relative to International Oil Companies (IOCs), such as ExxonMobil, BP, or Royal Dutch Shell, has risen dramatically in recent years. NOCs are also increasingly investing outside their national borders.” ~ Wikipedia

Seems to me that oil companies are their own subsidies… like printing money and buying it back… or communism… or monopoly… ‘u^

“Go directly to jail. Do not pass Go. Do not collect \$200” ~ ‘Monopoly’, board game

Me: “Hey, Nick! What are you doing here!?”
Nick G: “I got caught again for sleeping in my stranded EV on the side of the highway that’s becoming increasingly difficult to drive on. It will cost me another \$200 to get it out of the pound, but I might just leave it there for good.”

• Fred Magyar says:

The problem I see with this type of comment is the way it´s distorted and information is held back, to make believe the fossil fuel industry is getting subsidies in say USA and Europe.

Are you seriously trying to say that the fossil fuel industry doesn’t get any subsidies in the USA?! I’d say that is BS!

In the United States, credible estimates of annual fossil fuel subsidies range from \$10 billion to \$52 billion annually yet these don’t even include costs borne by taxpayers related to the climate, local environmental, and health impacts of the fossil fuel industry. As of July 2014, Oil Change International estimates U.S. fossil fuel subsidies at \$37.5 billion annually, including \$21 billion in production and exploration subsidies.

• Baloney.

• Dennis Coyne says:

Hi Fernando,

Quite a strong argument. 🙂

So you don not think a tax break given to oil and natural gas companies qualifies as a subsidy? This is focused mostly on the US, in Europe where most people agree with the mainstream climate scientists, things are different and there are fewer (or perhaps no) subsidies for oil and natural gas producers.

27. Here’s a link to Daniels blog from Venezuela

http://daniel-venezuela.blogspot.com.es/2015/03/bloomberg-goes-to-core-of-us-sanctions.html

I keep hearing and reading bad tidings from Venezuela. Daniel writes about students starting to appear with their hands bound and shot in the head. I keep reading reports about bodies appearing all over. It seems to be a pretty ham handed way to frighten the population. And it might work and stop the riots some say will break out. What these murders won’t do is stop the ongoing migration of competent people. And the oil field and refineries need quality people to get things done. I would expect venezuelan oil production to keep dropping. And hopefully sonebody will get a lucky chance to end the commnist nightmare.

• Jeffrey J. Brown says:

Next step is to use force to stop people from fleeing, following in the path of countries like East Germany, North Korea and Cuba.

• Jeffrey, I try to help people get out. Thus far I have helped something like 60 venezuelans get out. And the choke point now is how to get the diplomas, school records, birth certificates and so on duly legalized so they are accepted outside.

28. Ronald Walter says:

Some analysis using Mr. Peabody’s Wayback Machine.

29. Jeffrey J. Brown says:

How Falling Oil Prices Are Hindering Iraq’s Ability to Fight Islamic State

http://www.wsj.com/articles/how-falling-oil-prices-are-hindering-iraqs-ability-to-fight-islamic-state-1426033756?mod=WSJ_hp_RightTopStories

BAGHDAD—Clobbered by falling oil prices, Iraq is headed over a fiscal cliff, unable to make critical investments needed to keep its oil flowing and still pay the skyrocketing costs of fighting Islamic State extremists, according to government officials.

Without a recovery in oil revenues, some fear the country is again sliding toward a breakup. “We’re battling on two fronts, both ISIS and oil,” said Mudher Salih, a former senior central bank official who advises Prime Minister Haider al-Abadi on financial policy.

One of the few bright spots for Iraq in recent years has been an impressive expansion of oil production. The second-largest exporter in the Organization of the Petroleum Exporting Countries, Iraq has added up to a million barrels a day of new capacity, to the surprise of many doubters. That has provided a fountain of cash that has smoothed over many of Iraq’s challenges.

But with global oil prices halving in recent months, Iraq’s finances are eroding rapidly. Revenues are expected to fall by 40% this year, leaving a deficit of more than \$20 billion, equivalent to one-fifth of spending.

Based on production through the first 9 months of 2014, and assuming no change in consumption, Iraq’s net exports probably increased from 2.3 mbpd in 2013 to about 2.5 mbpd in 2014 (total petroleum liquids + other liquids).

Anyone want to volunteer to go work in the oil fields of Iraq?

• shallow sand says:

Just got in and down, rough long day but learned some things I thought I would share:

A. Went thru run statements today. Short check in a short month (28 day February). Ouch! Least \$ since 2/2009 and second least since 2/2004. Double ouch.

B. Knew of some production for sale nearby last spring. Guy held out for high price, didn’t sell. Went ahead and drilled in summer. Still wants to sell, looking for about 1/3 of year ago number, won’t get that either.

C. Talked to local banker. Putting no value on oil leases/leasehold equipment for collateral purposes at this time. If want to take advantage of fire sale price, will need cash or other collateral. Year ago would have gladly lent \$ with lease as collateral. Not talking about for drilling, but to buy low decline settled production.

D. Violated my weaning off of business radio, by turning channel away from 58 prime country. Heard yet another say WTI \$20. Doesn’t that put Bakken crude at \$3-\$7? Do we keep drilling and holding off on fracks at that level too, or do we throw in the towel? Over 30 days of \$20 and we are likely shutting her down, maybe run each lease a day or two a month to try to hold it. Imagine the whiplash from the snap back up if we get \$20 WTI for 30+ days?

In any event, still hanging in there. Wish I was shale guy and still had production valued at \$150,000 per barrel and banks/investors throwing \$\$ at me! I would be doing some real high grading on the half cycle! LOL. Goat pasture full of crushed lime! That’s a good one guys. Keep them coming.

Maybe someday I’ll get one of those 640 Lufkin’s from a plugged out shale well and have my counties’ largest lawn ornament!! I can only dream. Good night!

• Jeffrey J. Brown says:

Mike & Shallow,

Do you guys have any idea what the wellhead price of condensate is in South Texas, versus a year ago (say about 50 API gravity)?

• shallow sand says:

Jeffrey. I’m not in S Texas and we sell no condensate, nor other natural gas or products. Sorry can’t help.

• Watcher says:

Talked to local banker. Putting no value on oil leases/leasehold equipment for collateral purposes at this time. If want to take advantage of fire sale price, will need cash or other collateral. Year ago would have gladly lent \$ with lease as collateral. Not talking about for drilling, but to buy low decline settled production.

Holy crap, they won’t accept anything but flowing oil as collateral!! And they price that at the wellhead, no doubt. Note this is a HUGE deal for the “Oh the big guys will just buy up the small guys” theory. The big guys have to finance the buy, and nobody will lend. hahahahhah

These bozos are all pretending. Their “2015 capex budgets” are utter silliness, probably a manifestation of a bunch of executives who needed to look busy for their bosses. There is no budget at all if the paper won’t rollover. It comes due, only new loans will fund that redemption and if the new loans ain’t there, neither will be the company.

• shallow sand says:

Keep in mind Watcher, I am not in a shale area, where apparently there are different rules. I am talking about making loans to buy existing, settled conventional production. I did call two guys I know, but have not borrowed money from, who are lenders at banks w fairly large energy departments. Have ran things by them in past but either didn’t buy or just went through local bank. Thought I would see how things were and what they would do if something near us came up really cheap. I am still waiting for a call back. They have seen our financials, and know we are not cranks, so I would expect to hear from them if they were able to lend right now. Maybe they are just busy.

Also, keep in mind we are pretty small, relatively speaking, and in a high OPEX area. But, I bet things have went 180 degrees on credit in many other places too. There were multi-million dollar loans around here last couple of years to buy conventional oil production for \$100,000+ per flowing barrel. Now I doubt a bank would make a loan to buy the same leases at \$10,000 per flowing barrel, unless the borrower puts up other collateral, and I do not think leases/lease equipment will fly. I may be wrong, and would welcome other input.

But again, folks may keep flowing \$\$ at the shale, especially if they do not understand. But I am pretty sure the banks have people smart enough to understand the shale.

• shallow sand says:

Read article posted by Rune down the page, says US majors will likely buy the big shale companies with stock.

Make sure you understand the scale I was referring to above is very small, privately held companies. Shale is dominated by public companies with market caps in hundreds of millions or billions. Whole different game.

• shallow sand says:

Jeff. Is Iraq’s definition of high grading finding the drilling location where one is least likely to be killed?

• shallow sand says:

Question for those of you who have more knowledge about these things. Why does thawing temperature seem to bring out well failures? Suddenly have a rash of tubing holes. Have noticed this in the past? Only thing I can think of is very cold weather plays havoc with chemical program, have to forgo some batch treat to avoid freezing up. In any event, spring is finally springing and the gun barrels are “loosing up” which helps. Mud is a bear though.

• Nora Kearney says:

Shallow,

FWIW, I don’t know if this is the same cause behind well failures, but in the north every spring we experience movement in the upper layers of the soil during the freeze/thaw cycles. It is called ‘heaving’ and is responsible for road damage, foundation shifting, fence failures, etc. Perhaps the same effect damages wells?

• Mike says:

Shallow, this is of no interest to anyone else here so I will be brief:

Be mindful of normal temperature gradients at the depth of your wells and remember just because it is cold on the surface does not mean it is not warm and toasty downhole. You are in Kansas, I imagine, or NE OK, in the Bartlesville, or Weiser, whatever; the freeze/thaw cycle up there is not, IMO, going to cause casing failures. You said tubing holes, not casing holes, right? If they are corrosion related, and you use corrosion inhibitors, its something gone haywire on the surface, likely related to cold and freezing at injection points. Maybe when its cold your guagers are just doing drive-by look sees, in the comfort of a heater and Alan Jackson music.

Cold does weird stuff to fluid phases and gun barrels will actually “turn over” in extreme temperature cycles and your oil pad will be below water. That will sort itself out, I reckon, with heat.

In desperate times of needing to lower production costs the absolute FIRST place to look is your production chemical protocol. It is the biggest “racket” in the service business and an operator must not rely on chemical companies too much for advise. They are in the business of selling chemicals and will always, always over treat this and over treat that. Under treat is not in their vocabulary. Emulsion breakers are not always compatible with reverse emulsion breakers in combined fluid streams, for instance injected at the wellhead. Mud, you say, could be formation clays, etc., but sometimes, more than occasionally, flocculants will “burn” oil to a point of it appearing to be mud. You can spend the next 3 years learning about production chemicals but don’t ever accept a treatment protocol just because your chemical guys says it works in his bottle tests. 9 times out of 10 I have found that 1/10th the recommended injection rates in ppm’s can be reduced, or injected at other places, and low and behold, you have cut costs.

Mike

• HVACman says:

” the absolute FIRST place to look is your production chemical protocol. It is the biggest “racket” in the service business and an operator must not rely on chemical companies too much for advise. They are in the business of selling chemicals and will always, always over treat this and over treat that. Under treat is not in their vocabulary.”

LOL! Those chemical guys are all alike everywhere! In the HVAC business, we use chemical treatment processes for the water flowing through our cooling towers, chillers, boilers, etc. to reduce fouling and corrosion. We engineers are continually kept in the dark by the chemical treatment vendors about their “secret sauces”. They demand exclusive rip-off contracts, use cryptic names for their treatment additives, and fiercely disagree with each other about what is right and proper treatment. A pox on all their houses.

• Mike says:

Now your talkin’; a pox on all their houses! I like it.

• shallow sand says:

Mike, thanks for the information. As I always note, I don’t have the field knowledge, but I’m trying to learn all the time.

Yes, tubing holes, not casing holes, thankfully. I am sure primary issue is inability to chemical when temps are well below freezing. We are, in effect, trying to “catch up” on chemical treatments this week.

Normally don’t think about it too much, but with very low price take notice of half a dozen off in a week after almost none in past two months. Always have seemed to come in waves, though, even in summer.

Had to shut some wells in recently, too low volume and unusually cold for late Feb., early March. Firing them back up seems to bring out some kinks too.

I hear a lot about service company price reductions, and we are getting them from most, but not from chemical co. yet, although we are whining about it on a routine basis. Rep. told us during price run up they had to raise due to chemicals being oil based. We are now using that argument, but so far to no avail.

I agree on your point re over chemical, have some continuous treat that I do not think we need, may eliminate. Discussed when prices were up, but rep said no way, of course. He is a good rep, though, comes when we call immediately.

• Bob Nickson says:

“Shallow, this is of no interest to anyone else here so I will be brief:

I know nothing about the oil business except for what I learned at the Oil Drum, and what I now learn on this site, but posts like what you just wrote are a big part of why I’m here. Post more not less Mike.

• Lloyd says:

What he said.
Mike, it’s like plumbing, only with the continuous chance of explosion or immolation if you screw up (or even if you don’t.) How could it not be interesting?

-Lloyd

• Mike says:

Thanks Bob and Lloyd; very much. There are parts of the oil business that people make their entire careers over; little guys like me have to do it all. Start to finish, mind to matter. I am in my mid 60’s but not a day goes by that I don’t learn something new, something that utterly fascinates me, humbles me, puts a big ‘ol grin on my face… or makes me want to crawl under a rock and not come out for a week.

M.

• Does your well casing pressure change over winter? What’s your well flowing temperature? Where are the holes?

• shallow sand says:

Fernando, do not have change in pressure, at least that we note. We do not measure flowing temp. Holes are tubing holes, usually appear in the normal places, close to the bottom, likely rod wear. I assume just due to what I referred to above, we have trouble with freeze ups when trying to circulate chemical in very cold weather, so we back off. However, it seems that problems do not arise until it warms up, and just wondered what the explanation could be. Could just be luck of the draw too, as they say.

• shallow sand says:

Fernando. Kind of embarrassed I didn’t know temp, so asked and measured. 54 degrees F. I guess its always in that ballpark. Idea we discussed was that down hole equipment contracts at the top of the hole when we have a deep freeze, then expands when we thaw, which affects the whole string, and wear that is probably about to appear anyway, appears. Make sense, or are we off on that?

Sorry I’m getting pretty off topic, but I guess at least I am sticking with oil, which is in the site’s title. LOL

• Mike says:

Your BHT is greater than 54 degrees, that is at the surface, yes? I don’t buy the contraction thing, sorry. Your tubing is not anchored, I assume, the elasticity (stretch) of 2000 feet of rods is more than you think; the ground up there can’t freeze what, more than 4 feet, at most? If you’ve had a half dozen wells develop holes in the tubing lately it might be coincidental, or somebody is just paying more attention since it’s getting warmer.

Don’t over analyze stuff when you can help it, Shallow; its just mother nature. And for God’s sake, whatever you do, keep them stinkin’ engineers out of it until the last possible moment…they’ll have you putting thermometers in all kinds of weird places. Sorry Fernando.

Mike

PS: Chemical salesman are always just the nicest people you can imagine. I have found that to be very true. They’ll always come a runnin’, with another drum of chemical, whenever you need them.

• If it´s chemicals then there´s nothing we can do to solve it from here.

I do wonder, do these shallow wells have paraffin problems? I would expect them to be fairly free of paraffin, but I don´t know where they are completed.

• shallow sand says:

Some do have paraffin issues, not severe though.

• Shallow, I don’t know for sure. I would need a wellbire sketch to understand what’s going on. But if you get tubing failures in the spring it’s either the chemicals or tubing stress changes due to temperature.

I have always been really keen on having thermowells put in the line coming out of the wing. It really helps do diagnostics.

• shallow sand says:

54 at top. Don’t have the kind of operation to do much at \$48 WTI other than try to keep them going up and down.

30. Caelan MacIntyre says:

Short Article:

Anarchism and the Peak oil argument
An anarchist analysis of what peak oil means for the fight for a free society

Sample Quote:

“Capitalism long ago took human psychology onboard in the form of the marketing and advertising industry. It lies to people, by using the basic human instincts of sex and fear, -i.e. it uses emotion rather than logic. And it works. However I am not proposing we do that here. What I am proposing is that we don’t concentrate in our efforts to bring about a better world by only dealing with logic which is what we and other Left groups tend to do. We must deal with and understand human emotion -sometimes referred to as irrationality which it isn’t but is probably an evolutionary older method of thinking that integrates much better with our immediate senses; hence use of imagery by advertising. Try go into a bar somewhere today and present your arguments logically to anyone and tell them how we need to build a sustainable environmental and an equitable society without dominant power structures and see how far you get. So in a certain sense our job is much harder because we are trying to build up something whereas it is easier for capitalism as it just has to appeal to our primeval instincts and goes around plundering the environment and killing those who oppose them.

More generally, you could also say that technology advance has grown greatly and for the system as a whole to advance any further it must advance socially to catch up as it were.”

• Ronald Walter says:

It’s commonly known as brainwashing by using propaganda.

McDonald’s arches are a perfect advertisement that tells you to eat, propaganda. The image on a tv screen along with the fries and a burger, the Big Mac, the message is there. Eat! Eat! Eat! It is propaganda.

Goes back to Pavlov’s dog, conditioning is brainwashing.

When you see a McDonald’s advertisement, it is the same as ringing the bell, it tells you it is time to have something to eat and the place to go is McDonald’s.

It works and that is why it is done.

Even an anarchist falls for it because they fall prey to the advertising too, they’re brainwashed but just don’t know it.

31. cytochrome C says:

Thanks for the link.
So very few understand anarchist thought.

• Caelan MacIntyre says:

Hi cytochrome C,
I seem to recall you from TOD, how are you? …But thanks, and yes, understanding it is a bit like being unchained or reborn.

• cytochrome C says:

Yep, I’m a old TOD person, although I posted under another name.

I had a class at UCSB in 1970 in Anarchist Thought by http://en.wikipedia.org/wiki/Raghavan_N._Iyer

It open a door that I never knew existed.

So few have gone down that path.

• Caelan MacIntyre says:

Interesting, and indeed about that path. More seem to be treading it these days, hence perhaps the increased surveillance (Fear? Instilling it, but also being subject to it the most?), though it is still uncertain what a lot of the effects that will have.
Perhaps it will rise again out of the ashes of collapse and chaos.

32. Political Economist says:

Here is a very interesting report from China’s Electric Power Industry Association:

http://www.cec.org.cn/yaowenkuaidi/2015-03-10/134972.html

It is in Chinese but contains lots of interesting information.

It talks about China has made major advances in energy efficiency. But it concedes that the easy-to-make efficiency gains have been mostly accomplished and in the future, further efficiency improvement will be more costly and more difficult. It mentions that as wind and solar play a bigger role, coal-fired power plants will have to adjust to intermittent renewable output more frequently, reducing the efficiency of coal electricity generation.

It discusses the long-term plan of China’s electricity sector, reflecing the semi-official view of China’s electric power industry. China accounts for about 20% of the world’s generating capacity and about one half of the world’s annual installation of new capacity. Thus, what happens in China will largely determine the trajectory of the world electric power sector in the coming decades.

As of 2014, China had 920 GW of fossil fuels power plants (including 830 GW of coal-fired power and 56 GW of natural gas-fired power; the remaining capacity probably consists of diesel generators); 300 GW of hydro power plants (including 22 GW of pumped storage); 20 GW of nuclear power; 96 GW of wind power; and 27 GW of solar power. China’s total installed capacity reached 1,360 GW by 2014.

By the end of 2015, China plans to have a total installed capacity of 1,460 GW, including 950 GW of fossil fuels power plants, 320 GW of hydro power (including pumped storage), 29 GW of nuclear power, 110 GW of wind power, 37 GW of solar power, and 1 GW of biomass power. (Note that China plans to add 100 GW of new capacity in the current year!)

By 2020, China plans to have a total installed capacity of 1,960 GW, including 1,100 GW of coal-fired power, 100 GW of natural gas power, 360 GW of hydro power, 60 GW of pumped storage, 58 GW of nuclear power, 280 GW of renewable power (including wind, solar, and other renewables).

By 2030, China plans to have a total installed capacity of 3,020 GW, including 1,350 GW of coal-fired power, 200 GW of natural gas power, 450-500 GW of hydro power, 150 GW of pumped storage, 200 GW of nuclear power, 670 GW of renewable power. Significantly, by 2030, China will have exhausted its hydro potential with the exception of hydro resources in Tibet.

By 2050, China plans to have a total installed capacity of 3,980 GW, including 1,200 GW of coal-fired power, 300 GW of natural gas power, 500 GW of hydro power, 300 GW of pumped storage, 400 GW of nuclear power, 1,330 GW of renewable power.

1) China is pursuing an “all of the above” strategy to maximize economic growth; energy efficiency improvement and renewables will be by-products but will not be priotized
2) China will not have decarbonization. By 2050, China will have a coal-fired power sector that is about 400 GW larger than today and the total fossil fuels power plants will have a generating capacity 600 GW larger than today.
3) China will no doubt lead the world renewable energy construction. However, the building pace will fall far below what would be required to achieve climate stabilization. By 2050, China is projected to have 1,300 GW of renewable power. If China accounts for one-third of the world renewable power in 2050, the implied world total renewable power will be only 4,000 GW (about two-thirds of the world’ total installed generating capacity today)
4) If China does build 400 GW of nuclear power by 2050 (about four times the US’s current size of nuclear generating capacity), there will be a high probability that a Fukushima-styple nuclear incident will hit China at some point between now and 2050, with davastating consquences for China and the global economy

• islandboy says:

After I made my post yesterday, I went off to attend the Annual Grace Kennedy Foundation Lecture given this year by a climate scientist from the local university. The entire event can be viewed at Youtube at:

If China does implement this 30+ year plan, my hope is that I am not alive to see it come to fruition. We will be so screwed! Hopefully Peak Oil will put the kibosh on the fossil fuel sections of those plans

Alan from the islands

• islandboy says:

After trying several times to embed short videos in my posts and not having succeess, the one time I post a link to a 2 hour video that I did NOT want embedded in my post, presto, it gets embedded!

Ron, Please feel free to de whatever is neccessary to change it back to a link only since, I only saw it long after the opportunity for editing had expired. My apologies. I would never intentionally try to embed such a long video.

Alan from the islands

• Watcher says:

Just post a link. Embedded vids may possibly cost Ron on the site’s bytes/month charge. A link opens in a different page/tab and the hoster would not see those bytes passing thru. It also keeps a big picture from splashing the middle of a thread, and the link is just as easy to click as the big picture.

• Allan H says:

Thanks for the video link. That was probably the best practical summation of the effects of global warming/climate change that I have heard. I find it sadly hilarious that Jamaica and possibly the rest of the Caribbean Islands are far ahead of Florida in their thinking and approach to this predicament.
A state that launched the highest tech systems into outer space has now banned the words climate change and global warming from government use. Does not bode well for the people down there.

• sam Taylor says:

Good grief. 400MW is the current entire installed world nuclear capacity. That’s absolutely insane. Not that there’s a hope in hell of it happening, but still.

• shallow sand says:

Can someone post the March, 2015 American Bankruptcy Institute Journal article about E & P debt? I think it would useful for many here to read. Thanks.

• Sam Taylor says:

Do you mean this one:

http://www.myvirtualpaper.com/doc/American-Bankruptcy-Institute/interactivejournal03-15/2015022001/16.html#16

I can only find it in that utterly awful paper-mimicing format, for some reason. A better format would be much appreciated if anyone could.

• shallow sand says:

Sam: Thank you very much. I agree the format is bad. However, the content is not. It is a very good, concise article which says that the banks with the credit lines are holding incredible power right now over the shale revolution. They could either break the companies or waive line of credit requirements. Think it is very worth reading. Mentions many things that have been discussed here re shale credit.

• Political Economist says:

I agree, it is insane for China to have this 400 GW nuclear program. Hopefully uranium shortage will stop it

• Doug Leighton says:

PE
I travel to Mainland China regularly and when I do I (always) visit friends who work for the National Energy Commission (formerly called the National Energy Administration). Once I picked up a head office hand-out that I’ve summarized as follows:

“In December 2011 the National Energy Administration said that China will make nuclear energy the foundation of its power-generation system in the next 10 to 20 years, adding as much as 300 GWe of nuclear capacity over that period. Two weeks earlier the NDRC vice-director said that China would not swerve from its goal of greater reliance on nuclear power. In September 2013 SNPTC estimated that 4-6 new units per year would be needed to 2015 then 6-8 units during the 13th Five-Year Plan Period (2016-2020), increasing to 10 units each year after 2020. In December 2014 the NEA said that China could manufacture eight full sets of reactor equipment per year.”

When I asked if they could really achieve this they said: Do you believe in fairy tales? That said, I think the following is a more-or-less realistic: At the moment nuclear power only contributes about 2% of China’s total production. Currently there are 23 power reactors in operation with 26 under construction, and more about to start construction. Even more reactors are PLANNED to give more than a three-fold increase in nuclear capacity to approximately 60 GWe by 2020, then 150 GWe by 2030. Owing mainly to input from Japan (but also Europe, esp. France, and the US), China has become largely self-sufficient in advanced reactor design and all other aspects of the fuel cycle. They are extremely proud of this. One interesting fact is that virtually every senior person in the nuclear industry in China is an engineer, many are nuclear engineers, and almost all of them received part of their education abroad, especially in the UK and the US.

Finally, respecting your comment: “Hopefully uranium shortage will stop it.” this is a very real possibility. And, every time I have asked about indigenous uranium sources I’ve received the same answer: That’s classified information.”

• Watcher says:

haha of course it is.

Hard to get uranium data. Bunch in Canada.

• Political Economist says:

Doug, many thanks for the comments.

According to the Red Book, China has only a small uranium resource base and is not a major uranium miner. I think the Chinese authority is probably deceived by the seemingly low uranimum prices that prevails in the market now.

• Doug Leighton says:

I agree, my feeling is that China has embarrassingly little uranium that it can source locally in the future. Of course uranium pricing is unlike oil, gas and coal in that fuel cost is a relatively trivial relative to the enormous cost of building, running and decommissioning the beasts but let’s not go there.

• Sam Taylor says:

How many reactors per year was France managing to install at the peak of their nuclear buildout. Maybe 1-2? They’ve built around 70 odd reactors in total. Population of France is 66 million, population of China 1.3 billion. In principle it doesn’t sound too ludicrous, but it seems likely that oil peaking, Uranium shortages and potentially other bottlenecks would hinder such a project.

Sometimes I forget what an insane scale everything in China is done at.

• Dennis Coyne says:

Hi Political Economist,

These plans will likely change as coal and natural gas peak and the cost of wind and solar become cheaper than coal and natural gas as coal and natural gas prices increase.

• Political Economist says:

We’ll see. I am just reporting the information and China’s semi-official view here

• Dennis Coyne says:

Hi PE,

I appreciate you sharing the information, I only point this out because the Chinese government forecasts are probably not much better than US EIA forecasts, and the EIA forecasts always tend to be unrealistic. The Chinese economists may share the optimism of their American counterparts. When coal prices rise to \$200/ton (2015\$), the heavy investment in coal fired electric power may become stranded. If not, then \$400/ton will do it, coal prices have doubled from 2002 to 2012. Oil prices increased by a factor of 5 over 10 years ( from \$20/b to \$100/b) and have recently fallen, they will likely return to \$80/b before 2016, so as peak coal approaches (probably before 2025) a \$400/ton coal price in 2015\$ will likely be seen due to high World demand for coal.

33. Rune Likvern says:

More shales

“Sellers will be companies like Whiting, handicapped by heavy debt and lacking the cash reserves or hedging contracts that would have provided some insulation from the market crash. Among the three biggest producers in North Dakota — Whiting, Continental and Oasis Petroleum Inc. — the value per-barrel of reserves has fallen by about half since June, the data show, meaning those reserves would cost a buyer half what they were worth eight months ago.”

• Rune, this sounds reasonable. The companies with the best undeveloped acreage should get a pretty decent offer. The drilling pace will be more measured, and we should see efforts to improve pipeline outlets.

• Watcher says:

Of course the companies don’t “own” the acreage. It’s leased, and they lose the leases if they don’t produce oil from them in X number of months. A buyer can just let the clock run and for a constant oil price, the company wanting to sell gets more and more desperate. That company also has loans to pay off over that time, and no cash with which to do it.

There is no shrewd strategy to be followed here. If the price stays low, default looms.

• shallow sand says:

Watcher, read the ABI Journal article Sam posted linked above at my request. Think you would enjoy it.

• Watcher says:

On my list of things to do.

• Watcher says:

Ya just went thru it. Have seen such things before. Am out of date a tad, used to be that if you wanted to know covenants you had to get the documents direct from the parties (and they usually were forthcoming), but now there is a fancy shmancy database of such and the article guys went thru it and gave a 3/4 quote of all shale loans have ratio covenants in them — meaning debt/EBITDA type things.
(and Rufus, EBITDA in a covenant is NOT non GAAP hahaha).

I thought the most powerful part of the whole article was on page 1 of it (page 16 or so of the pdf), the chart and text of high yield paper and its nature in shale. Look at the explosion of B paper since 2008. Reminder to all the sports fans, paper gets credit rating nomenclature that differs from Moodys to S&P to Fitch (the credit rating agencies). For S&P, “less than investment grade” (aka Junk aka High Yield) starts at BB. BBB- is the lowest investment grade. Moody’s has a different meaning for its letters, but that chart is S&P. Utter explosion in HY paper in the industry — and guess what folks, those were the ratings at \$100/barrel.

Choice morsels:

Total E&P debt is \$285 Billion compared with \$125 Billion in 2007.

Energy (not just oil) is 8% of the S&P 500 compared with it being 20% of the HY paper market.

“The fierce selloff of HY bonds in the energy sector since October has been 30-50% and is unprecedented in our memory.”

The juicy stuff starts page 84.

Oh, repeating the link:

http://www.myvirtualpaper.com/doc/American-Bankruptcy-Institute/interactivejournal03-15/2015022001/16.html#16

There is an amusing conclusion at the end . . . that the lenders won’t want to be the trigger of possibly hahahah global Apocalypse (where have we heard that before) and I guess the presumption is the lenders will do a noble falling on their own swords sort of thing. hahahaha. Ya that will happen.

The bailout cometh.

• Watcher says:

Hmmm, it occurs to me an energy bailout starts to edge towards act of war territory. It does immediate harm to Russia and the Middle East countries.

Of course they have their own central banks to do their own bailouts, but their oil industries don’t need a bailout. They aren’t running their oil fields on HY paper and the impact of a US energy bailout just holds the price low and takes money out of their pockets.

Not good.

OTOH ZH is splashing an article outlining all the occasions the BOJ has intervened directly buying stocks in the Nikkei recently so if you really want to do a skittles and unicorns style bailout where everyone is happy, you intervene in the oil market with printed money.

haha speaking of warfare, if the Fed intervened to the upside, maybe the BOJ would intervene to the downside. They import 4+ million bpd, and both can print infinite money. hahahahahhaa

http://www.zerohedge.com/news/2015-03-11/how-boj-stepped-143-times-send-japanese-stocks-soaring

• Lloyd says:

Hi Watcher.
…starts to edge towards act of war territory. It does immediate harm to Russia and the Middle East countries.

This is the best argument against a buyout or subsidy of some sort.

What does the US do if in three years or so, there’s not enough oil to go around and foreign producers stop accepting dollars for oil because the fed has screwed with the world financial system once too often?

-Lloyd

• Watcher says:

I would gladly pay you Tuesday for a hamburger today.

• Lloyd says:

They also serve who only provide Watcher with straight lines. 🙂

-Lloyd (with apologies to Milton.)

• Caelan MacIntyre says:

“Due to the volatile prices and high capital costs few deposits can be exploited economically without subsidies. However, some countries, such as Estonia, Brazil, and China, operate oil-shale industries, while some others, including Australia, United States, Canada, Jordan, Israel, and Egypt, are contemplating establishing or re-establishing this industry.” ~ Oil Shale Economics, Wikipedia

So, maybe ‘energy independence’ means bailing yourself out?

• Watcher, quite often a company holds acreage with one producer which has additional drilling locations. When we look at properties to buy, we evaluate the undrilled locations and prospects.

I always consider fully developed acreage a very low return play, would only buy it if it helps cut OPEX or delivers some other benefit. On the other hand, undeveloped locations are higher risk and deliver a bigger payoff if the team preparing the evaluation is highly qualified.

I realize you have some financial knowledge but I look at this with a different perspective.

The point remains that properties with undrilled prospects do fetch a higher price. And this means the companies kicking tires right now must be doing a pretty fast paced reservoir analysis. When they finish they will structure the recommendation and we should see the deals done in 60 to 90 days.

• clueless says:

Always tension between fear and greed. The buyers also have their minor problems. Suppose that a buyer has excess cash, but keeps waiting for lower and lower prices, and then “something” spikes prices 50%. Then they have to tell the directors and the shareholders “we missed our opportunity.”
Personally, I have met more people in my life who saw an opportunity and failed to execute, regretting it for the rest of their life, than those that lost everything. Remember, even bankruptcy can be the best strategy in that it buys time.
Anecdote about people. Someone will stand at the roulette table and see red come up 6 times in a row. Then, start betting black “because it cannot keep coming up red.” You and I know that the odds do not change. That same person wants to lock in a price for diesel fuel, but at a price 15% lower than current market. You call him 2 months later and tell him the market is now down 17% and we can lock in. His answer; “not now, it has been going down for 2 months, I think that it is going to keep going down.” Ironic.

• That happens. But you can run a simulation to see how it works:

You have a property for sale with product price, CAPEX, OPEX, and reservoir risk. There are ten interested buyers, each of them develops a different perception of each of these risk factors. You can run a stochastic simulation to see their individual value distribution curves. Each of them sets a price for the property, and they start negotiating. Sometimes the seller hints there are other buyers who are offering better prices (“if you raise the offer by X % is yours, otherwise we go to somebody else”). The bottom line result is that a buyer usually emerges, and this buyer is bound to suffer from winners curse.

When I was asked to look at properties for some company I always asked what the hell made them special to give them an advantage over the 9 other mullets who were looking at buying. Sometimes management was smart enough to give me an outline of what they considered a “strategic advantage” they had. Sometimes they turned out to be cursed with their own arrogance. And the price swings can kill a really sophisticated buyer, or make a big dummy look like a sophisticated buyer.

In this particular price swing there´s going to be properties changing hands, and I bet the winners will be the companies with money in their pocket and some sort of advantage. For example the ones with producing properties around the ones being sold. Or companies with a solid pipeline transport contract.

34. learner2 says:

Regarding Chevron’s results, they are saying they will increase production by 20% while cutting 14% capex, including higher production in shale. Does this make sense to you guys here?

• Watcher says:

I think the production gain hope was over a longer period of time than 2015.

• SouthLaGeo says:

Chevron is expecting big contributions on a BOE basis over the next couple years from Gorgon, offshore Northwest Australia. They have been making huge investments in this project over the years, and production is expected to start late 2015. Similar story with Wheatstone, but 1st production is a year or so from now.
So while they can reduce overall investments, and some associated production, that gets more than offset by the new production from Gorgon.

• Exactly. I didn´t see your comment when I wrote mine. I went over Chevron´s portfolio and it looks like the big additions are in Australia and the Far East LNG market. Also saw they have some additional gas in the Trinidad, and in Africa. Not too long ago I looked at Chevron´s performance over the last few years, and I noticed they have been gradually changing into more of a natural gas producer.

By the way, I was also shocked to see how much production they have lost in Venezuela. ALL of their existing properties are below their nameplate capacity. Most of those are heavy oil at Boscan or at the Faja, and they seem to be limping. What many people don´t know is that it´s very likely Chevron doesn´t get a penny from that production, because PDVSA is in such dire straits they won´t allow the joint ventures to pay dividends to their owners. Right now the oil companies with operations in Venezuela must be rooting like crazy to have Maduro disappear from the scene.

• Most of Chevrons increase is Far East gas. Chevron is gradually turning into a major gas company. Here’s a detailed document

http://www.chevron.com/documents/pdf/chevron2014annualreportsupplement.pdf

35. Enno says:

Thanks for the post Dennis.

A surprisingly excellent quality documentary about air pollution in China, TED style:

Hopefully it will have an impact, and > 150 million Chinese have already watched it. Unfortunately, after receiving initially support from the government, it now has become blocked within China.

• Political Economist says:

You call that excellent quality? The documentary was actually promoted by some forces inside the Chinese government with an interest in energy privatization. It might have some connection to energy business in the US too.

The producer, Chai Jing, has little understanding of the underlying energy and pollution issue. After talking about the air pollution problem that most informed people are already familiar with, Chai proceeds to provide her policy recommendation: not renewables, but to replace coal by oil and natural gas. She keeps talking about the illusion that China needs not to sacrifice economic growth in order to put pollution under control. She then makes the ludicrous statement that China’s natural gas production and recoverable resources could double if China simply privatizes the sector.

It’s one of the worst seemingly environmentally friendly propaganda, talking about having both economic growth and clean environment, based on completely uncritical faith in free market (Chai recommends just leaving the oil and gas sector to the market).

I think the Chinese government orders the documentary and the discussion about it to be removed from the web not because of the documentary itself (which, cannot possibly receive that much public attention without government sanction and it was promoted by all the mainstream media within China) but to prvent any serious and honest discussion about the underlying issues. The documentary drew lots of spontaneous and powerful crticisms about one or two days after it was posted.

I think the government may also be concerned that public discussions might turn into an obstacle to the planned energy sector privatization.

• It’s good to see the Chinese Communist Party transform itself into the Chinese Capitalist Party. It’s a good start towards ending corruption. But they’ll need a judiciary that’s independent of the new CCP leadership.

• Political Economist says:

I disagree about that (a capitalist party is a good start ending corruption). China has become more (not less) corrupt over the past three decades.

But I suppose this is not the main topic in this forum

• Political Economist:

China has become more corrupt as a natural consequence of a move into capitalism while preserving the omnipotent power of the Chinese Capitalist Party.

What the Chinese have is more of a fascist style command economy (they are only missing the personality worship of a supreme leader bit, however, that´s not really necessary for the fascism controlled by a mix of meritocracy and oligarchy they have developed. Their other problem is the failure to understand they need a full separation, with government regulating and providing oversight over more independent entities.

And to make sure the whole system works they need a much more powerful judiciary which can resolve inter company disputes, provide justice to an abused proletariate, and control government abuses. It´s a basic formula many countries ignore, to their detriment.

What I´ve noticed is that quite a few Political Economists and other social scientists fail to realize the change has to be complete, and the judiciary is a key element. In Latin America we have seen many partial changes, as we also saw in Russia. And now the Cuban dictatorship is also trying to keep a slave population as they move into a pure fascist oligarchy model. I think this is the political cancer of the 21st century.

• Dennis Coyne says:

Hi Fernando,

I am pretty sure that Political Economist is fluent in Chinese and has access to much more that is written about China than you do.

My guess is that he would prefer a more Democratic government in China and an independent judiciary, but Rome (or Beijing) was not built in a day.

He also may not look at capitalism as uncritically as you do, free markets cannot be perfectly free or you end up with externality problems, free rider problems, and monopoly problems, it has to be regulated by government to work well.

• Sam Taylor says:

“It’s one of the worst seemingly environmentally friendly propaganda, talking about having both economic growth and clean environment, based on completely uncritical faith in free market”

In fairness, a lot of the environmental movement in the western world is just as guilty of this. Even if we were to succesfully switch everything to wind, solar and nuclear, the growth paradigm would still ultimately come to a nasty end, with or without climate change.

• Bob Nickson says:

Can those who understand macro economics help explain something to me?

The statement that “you cannot have infinite growth on a finite planet” is often made, and seems intuitive, but isn’t growth expansion of economic activity and increase in the money supply? In other words, isn’t it just a measure of the volume of transaction that are being made over a period, and their value?

The money is fiat currency, so isn’t its supply theoretically infinite? And economic transactions includes the exchange of both goods and services. I’m not aware of any mandatory ratio between the two, so can’t the ratio of service rise over time in relationship to goods, or the economic valuation of goods rise over time?

For example, an Aston Martin could require less material to manufacture than an Ford F250 truck, and less embodied energy, but the manufacture and sale of an Aston Martin would contribute more GDP on a per unit basis than the F250 would, wouldn’t it?

So in theory, couldn’t you have a scenario where total vehicle manufacture declined in units sold, but a dramatic shift from F250’s to Aston-Martins meant that in spite of decreases in material usage, and embodied energy, the measured economic activity grew because the total monetary value of all of the exchanges was higher with the transition in demand to higher value product?

So isn’t it possible for an economy to grow based on increasing monetary value of services, even as total material and energy consumption declines?

So it appears to me that the truism above may not be true, as it mischaracterizes the nature of the subject of growth as material and limited, when in fact it is not, it is the number of zeros in front of the decimal point, and we have an unlimited number of those.

I’m ignorant here. This is a sincere question.

• Dennis Coyne says:

Hi Bob Nickson,

When people talk of growth, they usually mean real GDP where a constant currency is used and purchasing power parity(PPP) is used for inter country comparisons (instead of market exchange rates). So inflation plays no role. The unlimited growth idea and why it does not work is pretty easy to see if you assume high growth rates.

Does it seem reasonable that we could have 20% real GDP growth for very long on a finite planet. That would mean that in 50 years we would have 9100 times more stuff produced in a year, than we do today.

We will also run out of fossil fuels to produce the stuff, and would start to run short of critical inputs such as fertilizer, water, land, and so forth.

Typically the World real GDP grows at about 3% per year, so in 200 years we would only have to produce 369 times more stuff in the year 2215 than in 2015, which still seems unlikely to me.

One problem with the measurement of GDP is that there is a lot of economic activity left out. If I prepare a meal at home for my family and spend \$20 (labor is not included because nobody pays me) for groceries and electricity for the stove or oven and gas to get to the store and back. This is \$60 less than if I took my family to a nice restaurant for the meal. There was a time when women bought cloth and made clothes for the family, cooked most meals, cleaned the house, took care of the children, etc. Today most families have two adults employed and there are a lot more market transactions for take out dinners, childcare, house cleaning, clothing purchases, etc.

In the developing World there are many subsistence farmers who have very few market transactions and this activity (growing food and feeding it to the family) is not measured as GDP. As countries become more developed and more people work for a wage and become more involved in the market economy, GDP increases, but only because it is now captured in the statistics.

Bottom line, real GDP is by no means a perfect measure of economic activity. Population needs to peak and decline (sooner is better) due to falling total fertility ratio, hopefully reaching 1.75 or less by 2055 and 1.5 by 2100 and we need to transition to non-fossil fuel energy as quickly as possible because peak fossil fuels will arrive by 2030, rising fossil fuel prices will help speed the transition, but it will be difficult and a depression will likely result as prices rise and the economy makes adjustments. Collapse is possible, but not as likely as many assume imo.

• Bob Nickson says:

Thanks for your reply. I probably don’t even have the lexicon to fully understand your opening paragraph, but I think I understand the gist, which is that inflation plays no role, so my notion of infinite available zeros has no bearing.

But it doesn’t seem like my question about the ratio of goods to services is addressed. There seems to be evidence that GDP can be decouple from energy use due to efficiency gains. Can’t the same be true for goods? My smart phone embodies an enormous amount of less material than the vast pile of cargo that it has rendered obsolete.

When you write: “Does it seem reasonable that we could have 20% real GDP growth for very long on a finite planet. That would mean that in 50 years we would have 9100 times more stuff produced in a year, than we do today“, my answer is of course no, it does not, but isn’t that ignoring the services component and only looking at goods?

If there is an increase in the number of ‘coins’ in circulation, and the number of times they get exchanged in transactions in a given period increases, isn’t that the growth that is meant?

In a recession, the number of coins may be the same, they are just moving around less, right? Thus, shrinkage.

@Fred,

Yes, using Greer’s terms, I do understand that the secondary and tertiary economies are utterly dependent on the primary economy. If we collapse the ecology, no amount of human economic activity will compensate or be possible, but that still doesn’t seem to address the question as to whether the growth being discussed is indifferent to what the ‘coins’ are being exchanged for, so long as they are being exchanged.

What am I still missing?

Again, thanks for your responses.

• Fred Magyar says:

What am I still missing?

Bob, just watch Tom Murphy’s presentation at the link I provided and I think it will become much clearer as he specifically addresses your question.

To be clear Greer’s collapse isn’t what I was referring to, Tom Murphy is a physicist and he deals with the laws of physics.

I also recommend a presentation titled “Ecosystems Thermodynamics by Aiko Hukauf. You can download the PDf file here.
http://www.uni-kiel.de/ecology/users/fmueller/salzau2006/ea_presentations/Data/2006-07-05_-_Thermodynamics_II.pdf

Economics isn’t science, what Murphy and Hukauf deal with is.
QED!

Cheers!
Fred

• Bob Nickson says:

Thanks Fred and Dennis. I appreciate your explanations. I’ve had to turn my attention back to work, so I haven’t really digested them yet, nor have I had a chance to watch the video yet Fred, but I will do so and give everything some thought.

Thanks for the education.

• Dennis Coyne says:

Hi Bob Nickson,

Forget the amount of money, that is simply an arbitrary measure. How fast money circulates in the economy is not really an issue here, that has to do with money supply and so forth, but by using inflation adjusted dollars we take money supply out of the discussion.

There will always be both goods and services in an economy, are you proposing that services can grow without bound, while we keep material goods fixed?
This might work up to a point, but I think in practice you would run out of things to service, as well as the tools needed to provide the service. Take financial services as an example, nothing material is provided, just good advice, provided perhaps in a pdf sent by e-mail. Could these financial services be provided without any computers? Doubtful at best.

Also when I use stuff, I meant both goods and services.

Note that the decoupling of energy from GDP is only true in part. First you have to look at the whole world and energy is being used more efficiently, but there are limits based on physics as to how efficient any process can become. Again one simply has to imagine how well the economy would run with no energy to realize that there must be a limit. When we can provide services without using any other material or tools, then these would still be limited by time. I have a hard time imagining that services might become one million times larger than the physical goods portion of GDP. The smart phone is an amazing gadget, it can play music, be used to search the web, make phone calls, text messages, that is all I use it for. I guess it would replace an ipod and a cell phone, so two gadgets become one, I don’t think it replaces a computer (or not for me). Making things smaller only goes so far ( I prefer the larger screens so I can read it.) Unless we can make our fingers smaller, or do everything by voice command (I would still want to be able to read the screen). Also material things are needed to produce the smart phone (factories for example) and these do not necessarily get smaller over time, in fact as product becomes more complex the processes and the factories to produce the product are likely to become larger.
See Tom Murphy’s post on this at Do the Math (link below)
http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/

• Nick G says:

are you proposing that services can grow without bound

This is the “strawman”. No one is realistically predicting that services will grow without bound. Any sensible person (and economist) expects that the economy will stop growing at some point, except perhaps in quality of services (and one imagines that has a limit as well).

in practice you would run out of things to service, as well as the tools needed to provide the service.

That’s not clear. If we assume population stabilizes, and “goods” stabilize, then the number of computers per person stabilizes as well. They’ll just keep on providing services using the same physical amount of equipment, although the equipment quality will probably improve.

• Fred Magyar says:

The statement that “you cannot have infinite growth on a finite planet” is often made, and seems intuitive, but isn’t growth expansion of economic activity and increase in the money supply? In other words, isn’t it just a measure of the volume of transaction that are being made over a period, and their value?

NOPE!

Bob, what you are missing is that the economy is a subsidiary of Ecosystems Inc. and Ecosystems Inc. has to obey the laws of thermodynamics. Therefore Growth has an expiration date and that date is quite close to just about now…

• Nick G says:

That is correct. Services can grow, without increasing commodity consumption. And, goods value can grow, without increasing commodity inputs.

It’s worth saying that the idea that infinite growth will happen is a straw man. Any economist will tell you that markets mature and industries plateau. For instance, the US car and steel industries both plateaued several decades ago.

• Dennis Coyne says:

Hi Nick,

I disagree with you here. Yes there can be technological progress, but there are always limits on such progress determined by the laws of physics. So your idea that the value of say a computer can continue to increase with the same amount of physical inputs and that this has no limit, is false.

On services, these also cannot grow without limit if materials and technology have limitations, unless you can think of services (and there are a few) that can be provided without any tools of any sort. These would only be unlimited if they could be provided instantaneously because there is still the limitation of time to provide the service.

There are many that argue that there are no practical limits to growth, you in fact seem to be among them.

So is growth limited or is it not limited?

• Nick G says:

Yes, growth is limited. Mostly – one can imagine quality improvements continuing for quite a long time.

The point: it doesn’t matter. People don’t really need more than one car per person, or one phone. Computers don’t need to get faster forever. People only need so much in the way of education, legal work, healthcare, etc.

Infinite growth is a “strawman” – something that no sensible economist would argue for.

• Futilitist says:

NickG,

You are right. No sensible economist would argue for infinite growth.

But all economists, with a very few exceptions, certainly favor perpetual growth, don’t they?

Biologists know that exponential growth always ends in collapse. And collapse begins as soon as growth ends. So, collapse is inevitable.

• Nick G says:

But all economists, with a very few exceptions, certainly favor perpetual growth, don’t they?

No, actually, they don’t. They favor growth for as long as is needed, which is very different.

For example, US home, home appliance, car and steel sales plateaued in the 1970’s. They grew to the level that was needed, and then growth stopped.

Biologists know that exponential growth always ends in collapse.

No, they don’t. There are many possibilities that happen in the wild. Collapse happens sometimes, and sometimes population levels fluctuate/oscillate around an average level. Sometimes growth ends in a plateau. I suspect collapse is the exception.

36. Watcher says:

Yo Mike, tool, whoever. Ante up on this comment from elsewhere:

My son is a petroleum engineer out here in the Bakken; I’m just the dull old man. He ran through some numbers with me over the weekend showing the repair costs of a particular well at over \$300k and the company, a larger operator here, simply texted him the following message: leave esp insitu, recal bop, sdfn.

Translated that means: don’t pull the broken electric submersible pump-just leave it in the bore, recalibrate and test the blow out preventer valve and then shut down well site until further notice.

How often do already producing wells need service. Shut those guys down and the decline rate field wide gets steeper.

• Mike says:

Damn, Watcher, you are getting pretty good at this oilfield stuff. I’m gonna make a hand out of you yet.

ESP’s are high dollar to repair. Efficiency appears to be down on this well, they wanted to replace the ESP until the boss man found how much, he then said hold on a damn minute, recalculate the BOP(d) it IS making, and shut down for night.

The boss man he’ll then go home and have some scotch over the matter and think about it some; the next morning the orders will be: O25DAB,RUN (oil’s 25 dollars a barrel, are you nuts!), TNWWTW (there’s nothing wrong with that well!), RDGHOT (rig down and get the hell outta there!).

Wells generally need down hole maintenance two times a year. On rod lift wells that can require 40K a pop, with no problems. ESP’s are very expensive.
Mike

• Watcher says:

So it’s gonna be more for NoDak shale because of the salt encrustation. These already existing wells have costs beyond the truckdriver.

The overall context of that comment above was the theory that the right thing to track was service rigs stacking, not Baker Hughes drilling rig stacking. That would tell the real story past the company public BS statements about what they are really doing.

• Mike says:

The first paragraph makes no sense to me whatsoever. The 2nd is a thought, for sure. When the workover boys are in the yard, that’s a BIG problem. That’s like pulling the plug in the ER. You’ve made a (gulp), good observation there, Watcher.

• Watcher says:

Not my observation, it’s from a comment thread elsewhere.

We went thru the salt stuff months ago. NoDak water flow is much much more salty than Texas flow. They have to ship freshwater trucks to wells periodically and flush the well with fresh water to break up the salt.

• shallow sand says:

The thing that hit me was that they are using ESP in the Bakken already? Again, don’t have knowledge others do but I thought you go to ESP when you cannot get rod pump to pound because you are making too much fluid. So is the too much fluid oil or water in this instance?

We run a couple ESP in WSW for two of our water floods. They are not cheap. High electric and high repair/replacement cost.

I guess hearing they are using ESP already, and they haul water to boot, makes me really question how long these wells will be feasible to operate.

Another thought I have had, and this ESP thing is driving it home, is that brand new wells, especially the flowing variety, have very low OPEX. The best well we have ever drilled lowered the entire leases OPEX per barrel by more than 2/3 in the first year till it started to fall off, that being a lease that already had 14 producers.

You go from a flowing well with little produced water to an ESP with a lot of produced water, that you are TRUCK HAULING, with a decline of 75% in two years, the OPEX will climb not by percentage terms but by exponetially. Wow.

I’d sure like to see how the numbers are going to work on a Bakken well that is down to 30 bbl per day, with an ESP, sucking about \$100K in electric per year, that costs \$300k to pull and repair/replace, truck hauling at least two loads of water a day, with high chemical expenses and where basis is \$15+ below WTI.

If this is the standard well profile 5 + years from IP, this whole shale thing is a farce.

Surely this isn’t how it is?

• Shallow, I´ve supervised large fields which had wells equipped with ESPs, beam pumps and jet pumps.

Our economic analysis at the time told us that a well making more than about 600 barrels of fluid per day, making about 80 % water, and lifting from around 7000 feet should shift over to an ESP. We didn´t want to install anything larger than a 640, and we also found a ready market for the 640s we changed out in the new wells we were drilling (a 640 worked very well for a new well making mostly oil).

The ESP interventions were about once a year. We emphasized a lot the quality of the connections, as well as drilling wells to avoid having the pumps set in a kinked hole section. The other issues which really helped was to keep the pumps running without any shut downs (it keeps the seals from taking water), and we also set a home made filter on the pump suction to avoid solid scales and sand getting into the pump. FInally, we had an engineer devoted fully to witness tear downs, and we had all the pumps on variable frequency.

For the beam pumps we really focused on the rod quality. We had an engineer with a materials degree inspect the rods as they were delivered. He found a lot of defective rods, and over the years the steel companies learned not to send trashy rods to our warehouse. They sold it to the guys over the lease line who didn´t watch out for rod quality.

The salt problem is usually treated with fresh water slugs down the annulus, we had to make sure we put a lot of oxygen scavenger and filtered the hell out of the water.

In Venezuela I had a field engineer stationed in the field doing nothing but taking samples, running spot inspections, and making sure field personnel followed procedures. What you´ll find is that sometimes you get a field hand who´s hungover, or lazy, or has a bitch, and will dump all sorts of crap in a well to get back at the world.

The cost to do an ESP change is so high it´s a really critical objective to increase run life and avoid those interventions. And I suspect the guys operating the Bakken with such variable well rates, GOR, water cuts, and salt are having a hell of a time learning the ropes for that particular area.

• shallow sand says:

Fernando. Thanks for the info.

• shallow sand says:

Yep Mike, that is akin to saying, “We give up on this well, it is impossible for it to make \$.”

• I bet one can fire this thing up in a spreadsheet and show a marginal well will do find if it´s shut in, the ESP installation delayed six months, and the job is done in a lower cost environment with higher oil prices.

You know, you guys are right. What the models need to show is the number of wells going off line and not being repaired because the operator thinks it´s more profitable to wait a few months.

• shallow sand says:

I really wish I had some LOS for a group of bakken/EFS wells, in particular ones that had been producing for a couple years or more. Would not surprise me if OPEX per barrel is \$20 or more for those. Then when you figure that many companies are throwing well failure expenses into CAPEX, I bet you will find several already in the red now and that number growing quite a bit next year if we stay around \$50 WTI, especially in Bakken. When I saw ESP, especially if we have a more difficult water, I immediately thought, oh no, this is not good. I have looked at some stuff out west that had ESP, made a lot of oil but also a lot of water, but low sulfur stuff, so not a lot of failures. With their low basis, they are really struggling right now. I bet KSA knows about shale better than we think and knew not cutting plus the financialization of crude would deliver the knockout punch. I’d say those PV10 figures are probably even worse than we think, the costs in future years may be too low if these are going to be on ESP and hauling water.

• Mike says:

I see AFE’s and I do have LOE statements for producing shale wells. I have tried to give insight into what these wells actually cost and how much it requires to operate them but people would rather rely on website dribble, or speculate about it. Its more fun to guess, I guess. And for some reason all anyone can guess about is the Bakken, even though I believe the EF and the Bakken are siblings. Whatever.

ESP’s have limited application in the EF; there is often an H2S issue, that I think is increasing with depletion in some wells in the western part of the trend, and there is mucho paraffin in lots of wells. By observation only, after a brief fling with gas lift 98% of shale wells end up on rod lift. A rod job to replace a THD DHP, 30K. If the tubing needs to be pulled, the TAC replaced, the tubing hydrostatically testing going back in, 50K. Rod lift at 8-9000 feet sucks.

You boys don’t have a clue what it takes to dispose of water either. You have to get a number at most disposal facilities and its sometimes 2 hours, at 120 an hour, to get your number called.

Watcher is on to something (gulp) regarding the shear volume of wells that might get shut in because of cash flow issues, which, by the way, is going to get worse, quick, as WTI and all of its counterparts is going down another 10 bucks in the next 30 days.

M.

• Futilitist says:

Hi Mike.

I agree, and it might go down more than that.

• shallow sand says:

Mike. You are on the money re economics of hauling produced water. If we were not disposing of own water with own truck in own disposal, the few wells we have not tied into an injection system would be shut in. Cannot work here with contract water truck into commercial SWD at sub \$50 WTI.

Do the EFS numbers you see agree with my idea that OPEX per bbl rises dramatically after first 12-24 months of well life?

ND has well by well public data and is more current than TX. Think that is why folks, including me, who’s only knowledge of shale is thru the Internet, focus on it more. Be sure I’ll read all you post re EFS. It produces more than Bakken and should have better economics due to location.

• learner2 says:

Why do you think its gong down 10 bucks, if wells are being shut in?

• MBP says:

Depends on how long they leave the ESP in the hole. If they plan on pulling it soon its fine, but if he wants to leave it TA’d with the sub pump in the hole he is crazy. If it is not economic, he needs to pull the ESP and set a CIBP and hope the acreage is hbp’d by another well that is producing. Leaving that ESP down hole for an extended period of time is asking for major corrosion issues. Last most we pulled a rented ESP (ugh) that we left down hole in a down well for 8 months. Went to the pump teardown. It was gross.

As for producing volume, we have run some small ESP’s on wells that were producing <250 bfpd, though I don't know why. I think one reason that was tried was we were having very frequent rod failures and the thought was switching to an ESP would fix that. I'm just not sure the motor will run effeciently with that small of a fluid volume.

Salt – There are fields in the Permian that have major salt issues, probably more than the Eagle Ford. For those wells, the last thing we would do would be to pump fresh water down the annulus, it would dissolve the halite crystals and increase the problem. Those wells can't even be drilled with fresh water, starts dissolving halite all over the place and then you cant ever pump enough cement to get it back to surface. So I guess it depends on the situation how that problem is treated.

• shallow sand says:

Thank you MBP. I always read your posts.

37. Futilitist says:

I think the price of oil might be reverting back to the long term downtrend:

• Futilitist says:

Here is a longer view:

• Allan H says:

Latest take from the Wall Street Journal.

Personally, I think the bottom will continue to be tested until domestic oil production shows a steady drop. Then it’s back to roller-coasterville as far as prices go.

• Futilitist says:

“Personally, I think the bottom will continue to be tested until domestic oil production shows a steady drop. Then it’s back to roller-coasterville as far as prices go.”

The bottom may be a long way away. Huge oil inventories will have to be worked off before prices can begin to rise significantly. But every producer is still all in, waiting and hoping for the competition to clear the field. That means that it will take some very major destruction of productive capacity before any kind of bottom can ever be reached. I think it makes sense to expect lower oil prices.

• Futilitist says:

WTIC spot \$47.02 (bouncing off a low of about \$46.95)

• nNgass says:

With technical chart analysis any statement you want to project as truth you can. In the chart below if someone put in those 2 lines I did could easily, at that time, “demonstrate” that the oil price is collapsing. Days later it rocketed and his analysis was dangerously misleading since there are people out there which take chart analysis as gospel.

• Futilitist says:

I know that technical analysis is mostly guessing. It is the least important of the reasons that I think oil is about to drop significantly. I made a comment about that further down the page.

It should be noted that I drew the purple and brown lines more than two weeks ago, as a wild assed guess, long before the price ‘confirmed’ my ‘forecast’. The part you drew lines on hadn’t even happened yet when I drew mine. Two weeks later, my chart looks like a perfect prediction.

I certainly don’t think my chart is “dangerously misleading”.

Let’s see what happens next. (\$30 before \$50?)

38. Political Economist says:

These days China keeps revising its energy statistics, causing some confusion and possibly misplaced optimism.

China reports that coal production in 2014 was 2.5% lower than in 2013, or a reduction by 99 million tons.

But the 2013 coal production was revised up from 3680 million tons to 3970 million tons, or an upward revision by 290 million tons.

Similar changes happen again to the electricity generation data for the first two months this year. China just released that for January-February 2015, China’s total electricity generation increased by 1.9% from the same period last year (implying large energy efficiency gains) and conventional thermal electricity generation declined by 0.8% (creating the impression of steady decarbonization).

However, the total electricity generation for January-February 2014 was revised up by 2.9%, implying a growth rate of 4.9% between the first two months of 2014 and the first two months of 2015 based on the reported data.

The conventional thermal electricity generation for January-February 2014 was revised up by 2.4%, implying a growth rate of 1.5% based on the reported data.

I suspect the Chinese statistical administration may be partially motivated to revise up the energy numbers in the previous year for the purpose of meeting energy efficiency objectives in the current year.

39. ezrydermike says:

well all right…

“If we have learned one thing in the years since Solyndra, it is that, though individual companies can and do fail, it is a bad idea to bet against clean energy innovation. Even as a work in progress, California is demonstrating that the transition to more secure, sustainable forms of energy can also offer a more prosperous future.”

http://www.latimes.com/opinion/op-ed/la-oe-olsen-hochschild-california-solar-energy-20150312-story.html

• Fred Magyar says:

“If we have learned one thing in the years since Solyndra, it is that, though individual companies can and do fail, it is a bad idea to bet against clean energy innovation.

If you accept the realities and consequences of peak oil and climate change due to the burning of fossil fuels then betting against clean energy innovation is just plain stupid! All the vested interests in oil production and BAU notwithstanding…

40. Ronald Walter says:

Oasis has a good day.

The Bakken has 8744 wells, they’ll be pumped for another five or six years minimum because the oil is there and it makes good jet fuel.

The oil trains will continue to roll, Delta Airlines is a buyer of Bakken Crude.

41. SRSrocco says:

RON & PEAKOILBARREL FOLKS,

You are gonna love this:

Plunge Protection Exposed: Bank Of Japan Stepped In A Stunning 143 Times To Buy Stocks, Prevent Drop

As The Wall Street Journal reports, The BoJ has now gone full intervention-tard – buying Japanese stocks on 76% of the days when the market opened lower.

The Bank of Japan’s aggressive purchasing of stock funds has helped Japanese shares climb to multiyear highs in recent months. But some within the central bank are growing uncomfortable about the fast-paced rally and the bank’s own role in fueling it.

http://www.zerohedge.com/news/2015-03-11/how-boj-stepped-143-times-send-japanese-stocks-soaring

Yes, this might be from ZEROHEDGE, but it’s quoting a Wall Street Journal article.

GET READY…. the CHIT is gonna hit da FAN.

steve

• John B says:

I’m pretty sure a 15 year high in the market would be a good thing, not a bad thing.

• Futilitist says:

Till it crashes dude.

• Steve, it is perfectly legal for Japanese banks to buy Japanese stocks and ETFs. This has absolutely nothing to do with any Plunge Protection Teams, Japanese or otherwise.

But but simply buying equities and ETFs is not without risk. This opens the bank to huge potential losses. They can’t keep buying forever and eventually these securities could very easily crash.

You must remember that foreign governments and foreign banks have different rules than the Fed. It is perfectly legal for foreign government banks to buy or sell on the NYSE or any other US exchange.

Also: I was not aware that the PPT was based in Tokyo!

Some blogs, like Zerohedge, have no limits on stupidity.

• Watcher says:

The article was in the WSJ, picked up by ZH.

• I know that Watcher, I went to the WSJ and read the original article. My point is that it was that stupid Zerohedge that called it a Plunge Protection Team. The WSJ did not mention that. The WSJ just has a whole lot more sense than that.

• SAWDUST says:

Fed props up the stock market at critical times via it’s reverse repo market. Fed sells treasury bonds to big banks and certain hedge funds. Then the fed buys those treasury bonds back at a later time at a higher price leaving those banks and hedge funds that are in the club flush with cash. Then at critical moments the fed will send one of it’s members out to calm the market. Usually Mr. Bullard. He jawbones the market higher by mentioning more QE or whatever. Those Big banks and hedge funds rush in and buy the market the nanosecond Mr. Bullard starts to speak.

• Watcher says:

I have never looked into this, I probably should, the foreign equivalent of ADRs (American Depository Receipts) would be an obvious mechanism.

ADRs are what allow Sony or Nestle to trade on US exchanges. What I haven’t looked at is if there are Japan Depository Receipts for Google or Exxon so that they can be traded on the Nikkei. If so, obviously, the BOJ can buy them.

• SAWDUST says:

JOB can buy through any proxy just as the Fed can. All JOB has to do is provide the liquidity it doesn’t actually ever have to own any S@P 500 futures. Their proxy can buy dollars then use dollars to buy S@P 500 futures. BOJ’s balance sheet may never actually have S@p 500 future purchases on it. But the BOJ’s favorite hedge funds surely have a lot of S@P 500 futures on their balance sheets.

42. B says:

Strong turnout at Williston job fair

[Excerpt from article]
About 1,000 to 1,200 are expected to attend the job fair over the two days, said Cindy Sanford, who manages the Williston office of Job Service North Dakota. The booths at the first day of the fair, geared mostly for the energy industry, were sold out. Today’s job fair includes all industries that had a waiting list.

“There still isn’t a job that we don’t need here,” Sanford said.

While Job Service has seen some laid off workers looking for new jobs, Sanford said she hasn’t seen any company make mass layoffs in the state. In fact, the number of available oil jobs Williston Job Service listed in January and February was slightly higher than the same time a year ago, she said.

But there has been a shift in what types of oil jobs are in demand, as the number of drilling rigs operating in North Dakota was down to 112 on Wednesday compared with more than 180 in mid-December.

Paye Tarpeh, who was recently laid off as a wireline operator, was among those looking for a new job. He has a Class A commercial driver’s license and was looking for any job that could help him pay his \$2,000 a month apartment rent.

“It’s really, really tough. The cost of living here is not easy,” said Tarpeh, who helps support family in Minneapolis and Africa.

Some job-seekers asked that their names not be in the newspaper because they’re still employed but looking for new jobs because their hours were cut. One truck driver said he was busy in December hauling sand for hydraulic fracturing, but recently he’s gone as many as 10 days in a row without working.

Monte Horst, a recruiter for MBI Energy Services, said he’s running into more workers who have been laid off, and he likes to hire them because they already have the experience.

“These guys have already paid their oilfield dues,” Horst said. “They need to keep working.”

At MBI, the company offers employees other positions when times are slow to avoid laying off workers, Horst said. The company recently readjusted a lot of employees and now is looking to hire for remaining openings, especially experienced and qualified truck drivers.

“We have a backlog on fracking and we’re still busy,” Horst said.

Bob Horab, owner of McCody Concrete in Williston, said employers are now able to be more selective with hiring than they were when they didn’t have as many applicants.

McKenna Larson, human resource specialist for Ackerman Estvold, also said she’s busy since oil prices declined. She is recruiting civil engineers, architects and construction specialists, and is getting applications from engineers who were laid off by oil companies.

People from around the country also continue to contact Larson with job inquiries.

“Even though the rest of the U.S. is picking up, North Dakota’s on the map and people are still really interested in what’s going on here,” she said.
[End of excerpt]

• Ronald Walter says:

Two large man camps were closed due to violations and the workers was forced to find housing elsewhere. The workers want to keep their jobs for obvious reasons, they might not find another.

They move to rental housing in Williston, ND.

112 rigs translates to 250 workers per rig, times 112 is 28 thousand jobs.

The wells pumping oil need to be serviced, monitored, you need a workforce to keep them going.

Week 9 of the BNSF carload report has petroleum at 10,250 cars.

I suspect the production will keep on keeping on in the near future, despite the oil price. The building of all of the infrastructure to move the oil will be utilized.

Demand rules the equation.

43. SP says:
44. Rune Likvern says:

Bear signal

”If oil supplies do overwhelm the ability to store them, the U.S. will likely cut back on imports and finally slow down the pace of its own production, since there won’t be anywhere to put excess supply. Prices could also fall, perhaps by a lot. Morse and his team of analysts at Citigroup have predicted that sometime this spring, as tanks reach their limits, oil prices will again nosedive, potentially all the way to \$20 a barrel. With no place to store crude, producers and trading companies would likely have to sell their oil to refineries at discounted prices, which could finally persuade producers to stop pumping.”

• Jeffrey J. Brown says:

And yet, based on the most recent four week running average data, US refineries had to (net) import 44% of the crude + condensate (C+C) processed daily in US refineries, despite huge C+C inventories (the key question is the ratio of condensate to C+C production and inventories).

As noted up the thread, I suspect that refiners continued to import a lot of crude oil because they have to, in order to meet the demand for the full spectrum of refined petroleum products. As also noted up the thread, based on an EIA projection it took roughly about half of the entire global rig fleet* to show an increase of about 0.5 mbpd in quality US crude oil production (40 and lower API gravity) from 2011 to 2014.

*Drilling for oil & gas

• Jeffrey J. Brown says:

As also noted up the thread, even if US producers were able to export unlimited amounts of condensate (over 45 API) and very light crude (about 40 to 45 API gravity), I wonder how much demand there is for it outside of the US, especially in regard to condensate.

I don’t see why refiners would want very much additional condensate (Pemex said no thanks already), which, I assume, would leave the petrochemical industry and the tar sand operators as the only likely buyers of consequence, and the question is how much more light stuff they need.

• Futilitist says:

I think that demand for oil is dropping world wide. I don’t know about storage, but I think the price of oil is already starting down. I posted a graph up the page on this topic.

The brown line is a tangent to the big decline before the bounce. The price seems to be reverting to the former downtrend.

The pinkish line runs through the mid point of the bounce. It represents sort of an average since the bounce. The price has dropped significantly below that average.

The blue line is based on the recent tops, and needs to be updated because the tops have started trending downward.

I realize technical analysis of oil price movements is certainly not science, but I have been watching other indicators too, like bid-ask ratios on the spot market. These are a good indication of current market psychology, and they show continued or maybe even increasing pressure on sellers.

It all adds up to another price drop.

And the equity markets seem to be getting into the act as well.

Of course, I could be wrong…

• Ronald Walter says:

It appears as though that you, Futilitist, did shoot one of the messengers, but then again, not.

Just google some old peakoilbarrel and the messenger’s ghost lives on.

I for one can thank you for doing the unthinkable.

Of course, I could be wrong…

45. Rune Likvern says:

Bear warning for the oil price!
So how will a stronger dollar and a possible rate hike by the Fed affect the oil price?

”Contrary to popular belief, the world is today more dollarized than ever before. Foreigners have borrowed \$9 trillion in US currency outside American jurisdiction, and therefore without the protection of a lender-of-last-resort able to issue unlimited dollars in extremis. This is up from \$2 trillion in 2000.
The emerging market share – mostly Asian – has doubled to \$4.5 trillion since the Lehman crisis, including camouflaged lending through banks registered in London, Zurich or the Cayman Islands.
The result is that the world credit system is acutely sensitive to any shift by the Fed. “Changes in the short-term policy rate are promptly reflected in the cost of \$5 trillion in US dollar bank loans,” said the BIS.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11465481/Global-finance-faces-9-trillion-stress-test-as-dollar-soars.html

• Rune Likvern says:

Oil going into storage => adds to demand => supports price
The steepness of the contango adds demand for those playing the forward curve…as long they have access to cheap storage if the contango flattens and/or shortage of storage for the players prices comes down
Storage “full” => less demand => prices comes down
Stronger dollar + (higher rates from the Fed) => more difficult to service those \$9T borrowed by the EM will at some point also affects demand for oil and thus price.
As these EM increased their borrowings in US\$ (doubled since 2007) this also allowed them to increase demand/consumption for oil and thus support a high oil price.
A stronger dollar and higher interest rate mean more local currency goes into servicing the dollar denominated debt.
Lower prices could prompt some suppliers to turn up the spigot in order to reduce impact on their own cash flow (debt servicing).

To me the stage appears set for a further decline in the oil price.

• Sam Taylor says:

Dollar denominated debt in emerging markets is also a big worry. If there’s going to be another debt crisis in the next few years, that’s where it’s going to happen.

46. Jeffrey J. Brown says:

Re: 2008/2009 Oil Price Decline Vs. 2014/2015 Oil Price Decline

In 2008, the last month in 2008 with an average Brent price of \$100 or more was 8/08, when Brent averaged \$113. The monthly low price point was \$40 in 12/08. The first subsequent month with an average price of \$100 or more was 2/11, when Brent averaged \$104.

From December, 2008 to February, 2011, the annual rate of increase in Brent crude oil prices was 43%/year.

Some Monthly Brent Prices, from 12/08:

12/08: \$40
1/09: \$43
2/09: \$43
3/09: \$47
4/09: \$50

In 2014, the last month in 2014 with an average Brent price of \$100 or more was 8/14, when Brent averaged \$102. The (so far) subsequent monthly low price was \$48 in 1/15.

Some Monthly Brent Prices, from 1/15:

1/15: \$48
2/15: \$58
3/15: (Average for March about \$60 so far)

One crucial difference between then and now is that the Saudis were cutting their production in 2008/2009, while maintaining their production in 2014/2015.

Another important difference is that we have seen a large increase in US light crude oil and condensate production since 2008, although EIA data and projections indicate that the increase in US quality crude oil production (40 API gravity and lower) has been fairly small, about 0.5 mbpd from 2011 to 2014. Although this has reduced US demand for imported oil, currently the US is dependent on net crude oil imports for about 44% of the crude + condensate processed daily in US refineries.

On the demand side, US and global vehicle sales were down year over year in both 2008 and 2009. In contrast, global vehicle sales hit an all time record high in 2014.

However, I would argue that the most important difference between then and now is that we have, in round numbers, burned through about 100 Gb of GNE* from 2009 to 2014 inclusive.

Based on the 2005 to 2013 rate of decline in the Top 33 ECI Ratio (ratio of production to consumption), I estimate that post-2005 global CNE (Cumulative Net Exports) are on the order of about 500 Gb (rounding off to nearest 100 Gb).

Therefore, based on the foregoing estimate, during the six year period from 2009 to 2014 inclusive we may have burned through about one-fifth of the total post-2005 cumulative supply of Global Net Exports of oil.

In other words, depletion marches on, at an accelerating rate of depletion in the remaining supply of post-2005 Global Cumulative Net Exports of oil.

*Combined net exports from (2005) Top 33 net oil exporters (total petroleum liquids + other liquids, EIA)

• Jeffrey J. Brown says:

Global light vehicle sales were about 83 million in 2013. A forecast for 2015 (about one million new vehicles every four days):

Slower, Not Lower: IHS Automotive Forecasting 88.6 Million Unit Global Light Vehicle Market in 2015

http://press.ihs.com/press-release/automotive/slower-not-lower-ihs-automotive-forecasting-886-million-unit-global-light-v

SOUTHFIELD, Mich.–(BUSINESS WIRE)–With 2015 off to a good start, IHS Automotive, part of IHS Inc. (NYSE: IHS), forecasts global automotive sales for 2015 to reach 88.6 million, an increase of 2.4 percent over 2014, continuing an unbroken five-year run of sales recovery and growth from the low point set in the depth of the Great Recession in 2009. However, a slowdown is being signaled with just two of the high-potential BRIC markets likely to see increased sales this year.

China will lead the sector’s volume growth, though IHS expects the market to slow from 2014. The North American market will continue its upswing, though the pace differs by country. The size of the contraction of the Russian car market remains a significant wild card that will impact the European market throughout the year, according to the analysis, while other countries in the region continue to recover at a rate of 2.5 to 3 percent, helped by the European Central Bank’s (ECB) commitment to full-blown Quantitative Easing (QE).

For the APAC region in 2015, China’s economic growth will decelerate further, to 6.5 percent from 7.4 percent in 2014, as a result of industrial overcapacity and weakness in the real estate sector. However, IHS Automotive analysts still expect light vehicle sales in China to grow by 7 percent in 2015 to 25.2 million units, aided with increased auto finance penetration, fast dealership expansion and government vehicle scrappage programs.

• Dennis Coyne says:

Hi Jeffrey,

Another difference between 2008/2009 and 2014/2015 is that the World economy was doing very badly in 2009, that is not the case today. In May we will see what happens, demand for oil picks up over the summer and inventories may be drained, also the lack of rigs operating in the US will reduce output, or at minimum stop the growth of output, it certainly looks like prices are headed lower, but the oil futures for WTI in Dec 2015 are at \$56/b. I doubt WTI will fall below \$42/b. I have been wrong about oil prices in the past and could very well be wrong now, nobody knows not even Mike.

• Watcher says:

Oh, vacillation now.

• shallow sand says:

ND rigs per state site at 111. On pace to 50 by June?

• Dennis Coyne says:

Hi Watcher,

No not really, there may be some short term volatility, I still expect \$75 by the end of 2015, probably will hit this by September and be between 70 and 80 in Dec 2015.

47. Ronald Walter says:

History doesn’t repeat, but it rhymes.

How the hell do you spell rhythm?

Your Grandfather’s Oil Shock:

1859 Aug 27-28, The US oil business was born in Titusville, Pa. Former army officer Colonel Edwin L. Drake drilled the first oil well in Titusville, Pa., striking oil at 70 feet and setting off a wild scramble for wealth similar to the California gold rush of 1849. The land belonged to the Pennsylvania Rock Oil Company. Until that time, the company had simply collected oil that seeped out of the ground. Drake’s plan was to produce it in large quantities for use in heating and illumination. Overnight oil fields sprang up in Pennsylvania but competition, disorganization and oversupply kept oil prices low. It was not until John D. Rockefeller and the Standard Oil Company came onto the scene in 1870 that the petroleum industry developed into a vastly profitable, although much hated, monopoly.

48. Watcher says:

A brief reminder.

If low oil price is threatening Apocalypse, then the price of oil will be raised. This will have nothing to do with “market forces”, unless you consider conscious decision to intervene by manipulation to be a market force (which it is, since 2008).

Don’t count your low oil price chickens before they are hatched. A point will be reached where a decision will be made. It’s a small club, and you ain’t in it.

That’s the first order conclusion. The second order reality is that at higher price, Russia is draining its enemies of money. This causes counter incentives.

49. Ronald Walter says:

If there is going to be a collapse in the next ten years or so, not everybody is going to die.

People who live in northern Siberia probably will make it. South Pacific islanders will probably survive. Laplanders in northern Europe will still herd reindeer, Inuit just a little southeast of Nome will probably survive too. Tribes in the jungles of the Amazon, high elevation populations in the Andes, Patagonia, will be unaffected. New Zealand might survive the entire ordeal.

Places like New York City, Los Angeles, Hong Kong, Beijing, Mumbai will more than likely have problems, food gone in three hours, traffic floods the highways and will jam to a standstill, general mayhem will prevail, chaos will reign supreme.

Not everybody is going to die.

There’ll be a lot of free gas for those who can punch holes in the gas tanks of abandoned cars along the freeways and major traffic hubs.

Dash cams, sky cams, as long as they continue to operate, will record it all, there’ll be documentation of collapse of densely populated areas.

Your Amazon account will be temporarily suspended.