Working harder and harder to keep oil production from falling

The challenges for private oil companies to increase oil production are pretty daunting.

ExxonMobil (XOM) has been producing a little over 2.4 million barrels of oil a day for the last year and a half, its lowest rate of production over the last decade. The dark blue line in the figure below shows the company’s production each year since 1999. Four years ago, Stuart Staniford noted that ExxonMobil’s 2001 annual report predicted 3% annual growth in production between 2001 and 2007. That projection appears as the red line in the graph below; didn’t quite come out as planned. Stuart’s theory was that the company correctly predicted the contribution of its new discoveries, but underestimated the declining production rates from mature fields.

ExxonMobil again predicted in 2006 that it could achieve 3% annual growth over 2006-2011. I’ve shown that forecast as the lighter blue line in the figure. We still have two more years to make that one right, I suppose.



Dark blue: ExxonMobil’s annual net production of crude oil and natural gas liquids in millions of barrels per day. 1999-2008 from company’s annual reports. 2009 based on average of 2009:Q1 and 2009:Q2. Red: forecast from the company’s 2001 annual report. Light blue: forecast from the company’s statements in 2006.
xom_production_oct_09.gif



The Wall Street Journal reported on Wednesday that ExxonMobil is prepared to spend $4 billion to buy 1/4 interest in the Jubilee oil field off the coast of Ghana, which would represent 15% of the oil giant’s 2008 capital and exploration budget. Alan von Altendorf thinks they can’t make a good return unless they sell the oil for $100/barrel. Presumably the company is reckoning on more oil in the field than current estimates suggest. But even if von Altendorf’s calculations are off by a factor of two, it still seems to signal a change in philosophy for a company that has historically been extremely careful with its investments in order to maintain its position as a very low-cost producer.

But what else is the company to do? It’s not like they haven’t tried to take advantage of Russia’s or Venezuela’s strong commitment to protect foreign investors or the peaceful aspirations of Nigerian rebels.

Chevron (CVX)
and many other companies are finding clever new ways to get more oil out of mature U.S. fields. That may well succeed in slowing the rate at which production from those fields declines over time. But to get the plot in the graph above to slope up you really need to develop new fields.

The New York Times is encouraged by the “brisk pace of new discoveries” which the paper reports “have totaled about 10 billion barrels in the first half of the year”.

The Oil Drum, always a party pooper, notes that the world likely consumed that much in the first four months of the year.

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24 thoughts on “Working harder and harder to keep oil production from falling

  1. Mark A. Sadowski

    By odd coincidence I’ve been thinking aboout geophsicist Marion King Hubbert this week.
    Dr. Hubbert predicted in 1956 that US oil production would peak at about 3 billion barrels in 1970. He was a little off. Instead it peaked at 3.5 billion barrels in 1970.
    He also predicted that US oil production would be about 1.2 billion barrels annually by now. Last year it was about 1.8 billion barrels. But he did make this forecast 53 years ago. His 1956 paper makes interesting reading. It is here:
    http://www.hubbertpeak.com/hubbert/1956/1956.pdf
    Hubbert’s curve is a logistic distribution function. Hubbert’s theory of oil deplection was rigorously tested in 2006 by Adam R. Brandt against five alternative models, using a set of 139 oil production curves. While none of the models completely dominated the others, the best model seemed to be an asymmetric exponential distribution. With an asymmetric exponential distribution the peak in production is sharper than Hubbert’s model and unlike Hubbert’s model, which was symmetric, the rate of decline in production is almost always slower than the rate of increase. This explains why US oil production is somewhat higher today than what Hubbert predicted over half a century ago. It also should be taken as somewhat comforting news for those concerned about a quick decline in production causing additional disruption beyond that already anticipated for the transition from conventional oil to substitutes. Brandt’s paper is here:
    http://www.iaee.org/en/students/best_papers/Adam_Brandt.pdf
    In 1974 Hubbert predicted that world conventional oil production would peak in 1995 at about 40 billion barrels. In 1976 Hubbert added that the actions of OPEC might flatten the global production curve and delay the peak for perhaps 10 years to 2005. In the late 1970s and early 1980s, global oil consumption actually dropped (due to large oil price shocks in 1973 and 1979, the shift to energy-efficient cars, the shift to electricity and natural gas for heating, and other factors), then assumed a lower level of growth in the mid 1980s. So this, an event Hubbert had not entirely anticipated, might have pushed peak oil even further back (2015?). “King” Hubbert died in 1989.
    Today conventional oil production has plateaued at just over 30 billion barrels a year since 2005. In August 2009, a report published by the government-supported UK Energy Research Centre, following “a review of over 500 studies, analysis of industry databases and comparison of global supply forecasts,” concluded that “a peak in conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020.” The report suggests that peak production will likely be less than 40 billion barrels a year and possibly less than 35 billion barrels a year, pretty close to Hubbert’s 1974 prediction. The report is here:
    http://www.ukerc.ac.uk/support/tiki-index.php?page=Global+Oil+Depletion
    Hubbert’s predictions, using a comparatively simple mathematical model, might just be coming true after a relatively modest delay.

  2. Cedric Regula

    GM China just reported a 56% ytd increase in car sales in China. Bet Hubbert didn’t know that.

  3. Joseph

    JDH: But what else is the company to do? It’s not like they haven’t tried to take advantage of Russia’s or Venezuela’s strong commitment to protect foreign investors or the peaceful aspirations of Nigerian rebels.
    It’s not like they haven’t tried to take advantage of the United States’ strong commitment to protect foreign democracies or the peaceful aspirations of corruption reformers.
    For example when the U.S. supported the violent overthrow of the democratically elected president of Venezuela, or when a delegation of Republican congressmen just last week went to shake hands with the military leaders who overthrew the democratically elected president of Honduras.
    Exxon has little room to complain about government corruption when they paid $78 million in bribes to corrupt the government of Kazakhstan, or paid $100 million to corrupt the government of Equatorial Guinea. Not to mention that last summer the U.S. Supreme Court ruled to allow a lawsuit to proceed against Exxon regarding the “peaceful” mercenary army they hired in Indonesia which kidnapped, tortured, sexually abused and murdered their political opponents and buried them in mass graves.
    Pardon me for not shedding a tear when Exxon complains about a little business hardball played by Chavez.

  4. tj

    It would be interesting to see a chart of additions to reserves for each dollar invested (adjusted for inflation). I know that XOM pulled out of Nigeria’s JDZ and let it go to China (SNP) and Addax. These are offshore fields that are less prone to rebel attacks.

  5. Cedric Regula

    Not to worry Fatman
    Honda sells lots off natural gas powered cars in the ROW. We have the technology.
    The big problem is the Supreme Court already ruled that CO2 is harmful to human health back in 2006. This means by law the EPA must shut down all producers of CO2. 87 new coal power plant projects in the initial design phase have been stopped as a result.
    It hasn’t gone farther than that because of the obvious practical problems of having the US population sitting around in the dark with our bicycles. Or roller skates.
    Of course we are still talking about cap and trade. That’s because it is really a tax increase.

  6. DickF

    Analysis of oil production from a demand side can be very misleading. In the 1920s the price of oil varied between 12-15:1 ratio to the price of one ounce of gold and held at that same ratio in the 1960s up to 1970.
    Since that time we have seen oil take more and more of a central role in the world economy. Such an increase in oil demand certainly should have raised the oil price in terms of other commodities and should be reflected in the oil gold ratio. This is especially true since we all know that peak oil is a shortage phenomonon driving up the price of oil. After all the dollar price of oil has sky-rocketed since 1970 and we all know that OPEC has controlled the supply of oil to generate a higher price.
    Friday October 9, 2009 gold closed at $1,048.98/oz and oil closed at $71.77/bbl a 14.6:1 ratio. HUH!!! Where is the sign of peak oil? Where is the sign of increased demand depleting our oil stocks? I thought “The challenges for private oil companies to increase oil production are pretty daunting.”
    I guess once again the market is getting it wrong because demand side analysts and forecasters are always right.

  7. Cedric Regula

    Fatter Man
    Don’t get too excited about electric cars. We have 330GW of coal electric power plants making 35% of the entire country’s CO2 output. And as I mentioned, the Supreme Court has made that illegal, but the EPA is still a bit squeamish about enforcing this law.
    So, still problems…..

  8. steve from virginia

    So it goes, more monopoly power in the hands of fewer producers, some producers pricing themselves into bankruptcy as $100 oil is unsupportable by any current form of economy.
    $100 oil is too pricey for motor fuel, which is a form of ‘entertainment’ or ‘pleasure’ use. Oil will be used as a chemical feedstock or high quality machine lubricant.
    $70 is too expensive to support economic growth, except in finance. Forget about electric cars, the cheap- auto industry requires $20 oil to make a profit. The ‘green shoots’ emerged when oil had fallen to $34 a barrel. There will always be Ferraris, of course.

  9. Cedric Regula

    At the risk of being a party pooper, I think the Peak Oil issue has been transformed to “Peak Planet or Peak Oil” and that is the new question. If we believe in Global Warming caused by human activity, or we find that governments do whether we agree or not, then we are already at or past Peak Planet, but there are still around 3 billion wannabe car drivers in Asia pushing us towards Peak Oil, with some supply-demand perturbations along the way of course.
    I dug up an old article on the US response so far. Here’s an excerpt highlighting the fact that we may not be able to count on the EPA’s prudent judgement. And the Sierra Club has been suing the EPA to take action on specific cases already. They have been bragging about their success on the Sierra Club website.
    =================================
    “In an effort to veil the economic havoc the Endangerment Finding could unleash, the current EPA administrator, Shelia Jackson, claims EPA will proceed cautiously, limiting initial action to mobile sources and perhaps reducing the emission threshold for permits.
    Anyone familiar with Supreme Court jurisprudence on the CAA knows this is subterfuge. Litigation would compel EPA action. EPA’s change of the black-letter statutory standards could be judicially reversed as an improper legislative action by an administrative agency in violation of the separation of powers clause of the U.S. Constitution.”
    ==================================
    Rest of article:
    http://www.wcmessenger.com/opinion/columns/EkuklupVpAhNEOcgBr.php

  10. Beezer

    It’s pretty much peak everything, particularly if China and India begin to funnel money down their economic ladder.
    If they do, the resulting boom in consumption will overwhelm available resources, and not just petroleum.

  11. DickF

    steve from virginia,
    Is oil at 100 supportable while oil at $100 is unsupportable? Why? What about oil at 500?
    If you answer this question correctly you should rethink your post. Is it really the absolute dollar/oil exchange rate that is the issue, or is it the CHANGE in the dollar/oil exchange rate? Then if gold is selling for $35/oz is $20 oil sustainable? What about gold selling for $1,000/oz, is $50 oil sustainable?

  12. S@ndy

    XOM are not really investing in digital oilfields or integrated operations (IO) as some others, notably ConocoPhillips are doing on the Norwegian Continental Shelf. IO is a broad term used for increased collaboration across multiple locations and disciplines, increased automation, more streamlined work processes, and increased use of real-time data. Moderate calculations by The Norwegian Oil Industry Association (OLF) state that the value potential of implementing IO on the NCS is at least 300 billion NOK. Daniel Yergin of CERA noted that the revolution in digital technologies could well transform the dynamics of world oil supply at a time when the industry faces major choices on investment. Once again, concerted technological advance holds out promise of dramatically expanding horizons and opportunities — and changing the big picture for oil and gas. CERA goes on to note in their DOFF (Digital Oil Fields of Future) study that potential to increase world oil reserves by 125 billion barrels in 6-10 years. Please visit http://www.olf.no/io/ for more information on IO. Look at http://www.npd.no/engelsk/npetrres/newsletter/no1598/default.htm for production profile on the Ekofisk field on NCS.

  13. GK

    I truly want oil to rise above $120/barrel and stay there. The short term pain will yield a much greater long-term gain, for a strongly positive net benefit.
    I want that to happen.

  14. Tom

    Actually, what you are describing is resource nationalism, not peak oil. Remember that the Saudis and other Arab producers are abiding by Opec quotas which limit their production well below capcity. That is by far the most important reason why the oil price rebounded from the 30s to the 70s (next being Chinese stockpiling, and only then the slight recovery of global consumption). Remember also that the Saudis have delayed one very large project and a few smaller ones.
    I’m sorry, but there is no global oil shortage coming to save us from global warming. There is still significantly more oil readily available for production than the global economy wants or needs.

  15. Noone

    GK – OPEC has set quotas for years based upon “reserves,” market demand, and desired pricing levels, but they go ahead and pump how much they want to in general (and in some cases during the past 5 years, they produce flat-out). At this point, there has been a pullback in demand, so less is being pumped for certain, and it seems like everyone is stockpiling for when prices increase again. However, you appear to make the fundamental error associated with Peak Oil theory – it’s not about how much is in the ground, it’s how fast we can get it out of the ground. While the building reserves will mitigate production issues for some time post-recovery, it will become an issue again once said reserves are depleted.

  16. bmz

    It doesn’t matter what happens to oil supply; we have 100 year’s supply of natural gas–and growing. Anything oil can do, natural gas can do cleaner and cheaper.

  17. Cedric Regula

    Nuclear!
    Yes! 3rd gen nuclear is ready and greatly improves on safety and also improves on fuel efficiency, so less waste to dispose of. 3 plants have started construction in the US. Once gaining some learning curve and redeveloping the supply chain and skilled people in the field… engineers, project managers, labor…costs can be as low as conventional coal.
    Problem is even proponents say we can’t build them fast enough to be the total solution. And we still need a waste depository (even for existing waste stored locally above ground now), and Yucca Mountain has been mothballed for now.
    Natural Gas!
    Yes. NG power plants are cheap to build, but high gas prices make op cost high. But prices look better, at least for now. NG plants make 30% less CO2 than coal, not to mention the other bad stuff. NG cars make 15-20% less CO2 than gasoline cars. T. Boone Pickens think we should convert over big rigs to NG.
    But we have over 600 coal plants now!
    That means we need to do some serious work making carbon sequestering practical. MIT did a study on what it takes to convert over coal generation to carbon sequestering. They state is possible to retrofit existing plants with carbon capture, but its not particularly cheap to do. They also say the potential sites for underground storage of CO2 in the US need to be proven out and developed into commercial sites. They suggest that is something for the USG to do.
    Once we have storage sites, then that would make new development of coal gasification and coal-to-transportation fuel plants feasible again.
    Fuel efficiency of cars is being increased by 30% and CO2 goes down by the same amount, assuming constant miles driven. Clean diesel cars increases efficiency 35% over gasoline cars, and Coal-to-Liquid technology can make low sulfur clean diesel fuel.
    Then there is hybrid and plug in hybrid cars, just to make sure we get enough diversity into the energy picture.
    There is a way to get there, just needs lots of management.

  18. Keith in Alberta

    Any of you notice that 1/2 of the worlds drilling rigs have been idled for almost 1 year, since there is about 1 year lag from drilling to production expect big production declines in the next few months. Like any business OPEC will seek to maximize their profit, I buy junk GM trucks for twice what they are worth but no one complains, OPEC can charge what they like, its their oil. Natural gas needs $7cdn/mcf, at $4.50 there is no drilling so the price will go up. If OPEC and other non freindly nations to the US feel that economic recovery can take place without the US (and it is looking like it now)expect them to stop taking US dollars so even if the US offers $500 US/barrel OPEC will say no. The US/Western countries have one great advantage over the world which no one mentions, we produce a majority of the agriculture comodities. I am a farmer and a 35 year veteran of the oil industry, I can produce canola oil cheaper than the oil industy can produce oil, in other words as oil gets really expensive (200/bbl) ag exports will slow. China is looking very powerfull now, set the price of soybeans or canola at 50/bushel because of domestic crush turning into bio deisel and then the world will beg for US dollars.

  19. GNP

    Tom, The irony of the OPEC quotas (when they are actually respected) is that they contribute to increasing forward capacity which will ultimately lead to lower prices.

    Otherwise, I agree that there is a lot more oil out there than many believe. Finding and extraction techniques have advanced considerably in recent years. Folks are actively innovating more efficient and cheaper techniques of extracting heavy oil and bitumen for example.

    In the background, North American is in for a glut of natural gas as far as the eye can see, thanks to the ability of horizontal drilling and fraccing techniques to inexpensively extract shale-bound natural gas. Within a few years or a decade at the outside, the globe will be awash in cheap, infrastructure-constrained natural gas.

  20. Tom

    Despite what you might have heard from McCain and other cheesy populists, Opec is not dominated by countries that “don’t like us very much” (Americans, that is). The reality is that Opec is dominated by US allies, especially Saudi Arabia and Kuwait. They are the real decision makers who have decided quotas, implemented quotas, and brought the oil price back from the 30s to the 70s.
    Iran and Venezuela love to harp to reporters with hawkish calls for tighter quotas laced with anti-American rhetoric, but they are not taken the least bit seriously by core Opec members, because, as a rule, Iran and Venezuela never implement quotas themselves. The truth is that Iran and Venezuela constantly subvert Opec and thus help keep the oil price down. Russia behaves similarly without being an Opec member.

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