Showing posts with label Yergin. Show all posts
Showing posts with label Yergin. Show all posts

Monday, August 31, 2009

Dr. Yergin guzzles the kool-aid.

I have frequently been critical of Dr. Daniel Yergin. For someone who has his background and influence in the oil and gas industry, he seems not to understand the business. In the past he has denied the peak oil theory and made unsubstantiated claims that we would be flooded with an additional 16 million barrels of oil per day. 

In this Foreign Policy article and in today's Wall Street Journal,  Yergin steps into it again. Instead of getting on board and pulling some weight, he raises the issues of climate change, industry regulation, alternatives and a number of lesser irrelevant issues. Clearly Yergin has drank the kool-aid, however its the grape flavor, of which the energy has no need or interest in. 

And maybe that's the point. Instead of contributing to the conversation about energy, he lays the groundwork for another book that will sell his vision of regulation, alternatives and climate change. Who knows maybe he'll start selling the hope and change mantra as well. 

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Sunday, March 29, 2009

Energies difficulties

There are a number of articles pointing to what I feel is the big problem that we face. The energy problems that we were dealing with last year seem somewhat distant. It appears there is a general consensus that the high energy prices were a result of market manipulation. Nothing could be further from the truth. Energy issues are being forgotten and obscured by our current economic condition.

It's therefore pleasing to see that many organizations are discussing what I feel is the big problem that we face. McKinsey Global Institute have published a series of articles about energy and do a good job in laying down the basics of the problems. Their articles are part of a series "Averting the next energy crisis: the demand challenge".

The same message is being articulated by Daniel Yergin and his Cambridge Energy Research Associates. Suggesting there is a destruction in our capabilities in terms of energy production. Although I consider CERA's projections to be far too optimistic. Even they are suggesting a loss of up to 7.6 million barrels of oil per day will be lost as a result of the decline in capital spending. Matthew Simmons of Simmons Consulting captures the point in the following article .

The global financial crisis and collapse in the oil market have stalled vital investment in oil exploration and production and are likely soon to lead to a sharp spike in prices, an energy consultant and financier says.
The economic conditions continue to deteriorate and will do so for some time. The Economist is stating that "Trade is Collapsing Everywhere" showing the unique size and scope of the problem. Expecting that the economy will be able to be stimulated back to its previously un-sustainable level, is wrong. We need to be focused on the issues that we can solve. The energy problem being the most important.

We need to start the process of building this software to support the Joint Operating Committee. Without first organizing ourselves to take on the challenge of supplying the market demand for energy, we will fail. Our organizations have proven beyond reason to be incapable of meeting the challenge we face. Does anyone believe SAP and the bureaucracy will enable our organizations to do the job? When we look at this situation form a long term perspective we see what our priorities are. Please join me here.

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Thursday, July 03, 2008

The IEA gets it.

The IEA has as their guiding principle "Energy Security, Growth and Sustainability through cooperation and outreach." This is the appropriate position for every energy consumer or producer. As consumers we should not limit ourselves in any manner. Acceptance of a lower standard of living, or a future that is constrained by energy, is a defeatist attitude and capitulation of the benefits of globalization.

As a producer the efforts to fulfill that promise to the consumer now comes with extremely attractive financial incentives. Isn't it too bad that the industry, which is at record levels of capital expenditures, is moving backwards in their production volumes. As is painfully obvious to most, the organizational methods of the industry do not enable them to participate in this market for much longer. This is not a job for the bureaucracy.

You can however mark me as surprised when I read the following in the Australian Business;

The IEA's outlook resonated with the views of oil company executives at an industry conference in Madrid, who said the red-hot oil market reflected deep-seated pessimism about the industry's ability to open the spigot to satisfy rising demand.
The industry actually kind of admitted they understand the problem. I have certainly made it clear that the producers management lack the motivation to do anything about it. And it will be the investor class that needs to fund these software developments in order to provide them with an alternative form of organization for their oil and gas assets. This quotation from a number of faceless executives at a conference is the first tangible recognition that a problem exists. We however, do not have the time to wait for these companies to do something about it. Our first act should be to axe the management of these failing firms.
Perhaps one of the most disappointing figures to emerge from the IEA report was its assessment of oil production by nations outside the OPEC cartel. Non-OPEC supply was "paltry to say the least", said Mr Eagles, the IEA's head of market analysis, and had been revised down since last year's market report. He said crude supply from non-OPEC countries would remain at or below 39 million barrels per day over the next five years, though it would rise after 2013.
The Wall Street Journal noted the following in their blog;
Project delays averaging 12 months, coupled with global average decline of 5.2% - up from 4% last year – are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady. “Our findings highlight again the need for sustained, and indeed, increased investment both upstream and downstream — to assure that the market is adequately supplied,” stated [IEA Executive Director Nabuo] Tanaka.
And Yale comes in with the following;
Global leaders fret about climate change and economic growth, throwing out blame in many directions. But finding fault or inequities does little to solve the problem of rising demand for energy and a declining supply, argues Chandran Nair, founder and CEO of the Global Institute for Tomorrow. The bottom line is that the world economy has become too dependent on fossil fuels.
It is tiresome to be reading these quotes about the problem. If you read the 2007 annual reports the companies could not be happier with the situation. They had the opportunity to do something about this almost five years ago. When I proposed this software development solution in September 2003, an idea that they clearly understood, and an idea they stole from me and handed over to Daniel Yergin's company, Cambridge Energy Research Associates to research. Isn't it also ironic that Daniel Yergin's "unprecedented 16 million barrels" of new production never showed up? Good thing CERA's 220 PhD's were'nt as quick as I was in publishing.

If the producers management thought it was such a good idea to spend money on the idea of using the Joint Operating Committee as the key organizational construct in September 2003 with CERA, doesn't this prove they are guilty of allowing this situation to occur? I repeat the management are not realizing this situation in a conference today. Matthew Simmons has been warning about it for almost a decade. These companies are not acting in anyones interest but the self-absorbed managements. Take any companies stock options and calculate the amount they "are in the money" and you'll see how effectively the scam has worked.

For example taking our favorite company in Canada, Petro-Canada, has options that "are in the money" for $410 million. And total 2007 option based compensation (Using $53.62, their end of year price) was $82 million. Just to make sure they don't seem too greedy, they did issue $255 million in dividends. (Note this was a topic of discussion on this blog in 2006, so it is fair to say the management did know about this.).

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Thursday, July 19, 2007

The Facts of the Case.

The graph presented above has been prepared by both the International Energy Agency and The National Petroleum Council. And both are listed as the source. This graphic spells out what has to be said about the energy industry. We are in deep difficulty.

The existing reserves seem to reflect the current production profile of the global oil industry. And this will achieve a significant decline in the next three years. From providing what appears to be 73 million barrels per day (mmb/d) currently. The decline in the latter part of 2007 until 2010 will drop over 25 mmb/d to approximately 48 mmb/d.

I don't dispute the sources of additional deliverability in "Known Reserves", "Enhanced Oil Recovery", "Unconventional" and "Exploration Potential" exist, they are just not in any condition to be able to start pulling such weight as what is expected / demanded in this graph. More or less the cupboards are bare.

Yesterday I made the comment that the exploration costs may total $12 trillion. This was on top of the National Petroleum Councils mention of $20 trillion in infrastructure. My $12 trillion comes about as a result of some analysis that was done in the late 1990's. Someone had allocated the industries costs of exploration over the various years increase in production. They came up with the figure of $300,000 in capital costs for each incremental barrel of oil. Not a replacement for depletion, but a certifiable increase in the global oil production capacity. Since it is 40 mmb/d in incremental production that we need by 2010, these values are accurate in my opinion.

At $300,000 for each incremental barrel, imputing a return on investment of 10% would create a financing cost of $30,000 / year. Take the financing costs and divide it by the 365 daily barrels of incremental oil production for the year. And you need $82.19 / barrel just to finance the necessary investment.

Until the market response to these values is reflected in the current commodity prices, we are in for a heap of difficulty. Based on the amount of press coverage received by the NPC's press release, I think we will need to realize this disaster before any action is taken. Was Dr. Daniel Yergin cowering during that presentation, I think he was, which I guess means that his 16 mmb/d in incremental production is not going to materialize. One should go back and read the excellent paper that Major Daniel Davis wrote. This information is not foreign to Dr. Yergin, he has access to maybe the best data available. I wonder why he said those stupid things back two years ago until yesterday? He should be embarrassed and looked at as the reason that the world waisted two critical years in attempting to avoid this disaster. Despicable.

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Tuesday, July 17, 2007

Energies importance.

I have a very interesting paper that is being published today. The paper is entitled

"Special Report: On the Precipice: Energy Security and Economic Stability on the Edge."

By Daniel L. Davis

July 17, 2007 (Click on the title of this entry to downlaod the .pdf)

This paper is unique in that it is written by someone who only has an interest from the point of view of how the lack of energy may affect people. Being that he is a Major in the U.S. military provides him with really little first hand knowledge of the energy industry. What prompted him to start researching and writing this paper is unknown, but it he does a spectacular job in framing his concerns, concerns that should be shared by all. In the final part of his paper, Major Davis reflects on many of the governmental failures that have occurred in the 21st century. How these failures reflect that in today's environment there is little in terms of warnings, and if you choose to ignore the warnings, the results can be catastrophic.

I will highlight the key points in Major Davis' paper and tomorrow will have a quick report on the National Petroleum Committee's report.

"That's why it is so critical that we recognize the potential scale of the problem today and take immediate action. As pointed out by Dr. Hirsch, if we begin taking action before the onset of the peak, the damage done and the pain incurred will be mitigated; if we fail to act until production at the wellhead announces the decline has begun, the pain endured will be markedly worse, and the risk of global instability will increase to a dangerous level. Dr. Hirsch clarified the scope of the problem in remarkably clear but sober terms in his February 2005 report when he wrote: p. 17
Mitigation will require an intense effort over decades. This inescapable conclusion is based on the time required to replace vast numbers of liquid fuel consuming vehicles and the time required to build substantial number of substitute fuel production facilities. Our scenarios analysis shows: p. 17
  • Waiting until world oil production peaks before taking crash program action would leave the world with a significant liquid fuel deficit for more than two decades.
  • Initiating a mitigation crash program 10 years before world oil peaking helps considerably but still leaves a liquid fuels shortfall roughly a decade after the time that oil would have peaked.
  • Initiating a mitigation crash program 20 years before peaking appears to offer the possibility of avoiding world liquid fuels shortfall for the forecast period.
The obvious conclusion from this analysis is that with adequate, timely mitigation, the economic costs to the world can be minimized. If mitigation were to be too little, too late, world supply / demand will be achieved through massive demand destruction (shortages), which would translate to significant economic hardship. There will be no quick fixes, Even crash programs will require more than a decade to yield substantial relief." p. 17
"If we are hit with a peak flat footed, having taken none of the mitigating measures recommended in the Hirsch reports, the cost to the United States will be extraordinary by any measure." p. 17
"The Logic for Action"
"No serious scientist, geologist or economist believes that the cheap crude oil upon which our society runs will last forever; all believe it will someday end. Since it is clear that an effective transition will be measured in decades, given that all agree the world has pumped approximately on trillion barrels of oil from the ground thus far, it is an imperative that we begin immediately to analyze, conceive, and then implement a plan to transition to alternatives before being forced to do so as a result of a supply in terminal decline." p. 17
"Impediments to Action"
"In a telephone interview Dr. Campbell made a point to clarify an important fact covering his projection of a 2010 peak: "There's only on thing I can tell you with certainty regarding my assessment: it's probably wrong! The question is, by how much. He explained that because there exists no globally enforceable single standard for reporting individual reserves, each nation and / or oil company is free to choose their own definitions of what they report, and to report whatever numbers supports their economic or political purposes." pp. 17 - 18
"Compulsion for Action"
"After playing out three disruption related scenarios, the group arrived at two key conclusion. In the 2005 report summary Dr. Gates wrote:" p. 20
"First, the economic and national security risks of our dependence on oil - and especially on foreign oil - have reached unprecedented levels. The threat is real and urgent, requiring immediate and sustained attention at the highest levels of government.

Second, if we wait until a crisis occurs to act, the nation will have to few, if any, effective short term remedies. To protect ourselves, we must transcend the narrow interests that have historically stood in the way of a coherent oil security strategy and implement policies that will meaningfully address both the supply and demand aspects of our current oil dilemma." p. 20
"This study was not conducted by some fringe group or obscure participants: it was carried out by individuals with premier levels of education and direct experience serving the government at the highest levels. And yet, despite their stark warnings of our country's vulnerability to reductions in oil supply and their clarion call to action, two years after the publication of this report nothing has been done. Whether the drop in supply comes as a consequence of disruption above ground or as a result of declining supplies below ground, the result on the global economy is the same. It is beyond question that immediate action to mitigates this vulnerability is require. But as hard as it might be to imagine, the threat to the economy may not be the greatest danger we face." p. 20
Dr. Gates of course being the president of Texas A & M, one of the premier engineering schools in the world, and is now Secretary of Defence.

"Unexpected Danger"

"But there is one other significant issue to take into consideration when contemplating the impact of a terminal decline in fossil fuels: the danger to food production." p. 20
"But in fact, without petroleum, we would only be able to produce a fraction of today's crop yields." p. 20
"The report begins by explaining that from the settlement of the US until the 19th Century, virtually all increases to crop production came as the result of increasing the cropland used. But of the quadrupling production since then, it states:" pp. 20 - 21
"As manufacturing developed, production of chemical fertilizers like super phosphates and, later, urea and anhydrous ammonia replaced most fertilizers produced from recycled wastes. Commercial fertilizers provided low cost nutrient to help realize the yield potential of new crop varieties and hybrids (Ibach and Williams,1971). Since 1960, yields per unit of land area for major crops have increased dramatically. For example, average corn yield has increased from 55 bushels per acre in 1960 to 139 bushels in 1994 and average wheat yield from 26 to 38 bushels per acre. If nutrients were not applied, today's crops would rapidly deplete the soil's store of nutrients and yields would plummet." p. 21
"The nutrients cited in the foregoing are almost all petroleum derived. The importance of those inputs was made even more clear in an updated version of the USDA publication in 2003." p. 21
"Large shifts occurred in particular inputs over 1948 - 96. Although intermediate inputs (fertilizers, pesticides, energy, feed, seed, and livestock) as a groups increased 1.42 percent per year over the period energy inputs increased less than 0.9 percent while pesticides increased at nearly 5 percent per year. Synthetic pesticides were just beginning to be used in the late 1940's, but adoption occurred rapidly, and by the early 1970's most acres in major crops were being treated. total pounds of pesticides applied peaked in the early 1980's, and have been relatively stable since then." p. 21
"It is crucial to note that energy inputs increases almost one percent per year, and pesticides increases an average of 5% per year for the 48 years of the study. What would happen if those inputs were suddenly curtailed one to two percent per year? What about a decade later when they were reduced 10 - 20%? 40 - 50%? The 1996 report explicitly stated that if the inputs were not applied, "yields would plummet." When we likewise consider the compounding issues like the impact of decreasing fuel supply to power the irrigation pumps - or fuel for the tractors and combines, the for transport rigs, the delivery trucks, and other declining - fuel supplies issues - it becomes clear that food production would become severely crimped by declining oil production. To further compound the situation, while the production of crude oil declines, the population will continue to rise." p. 21
"Population Effects"
"Consider that from the year zero until 1850 the global population increased from about 300 million to 1.5 billion – an average increase of about 65 million per century.59 From 1850 to 2006, the increase was from 1.5 billion to 6.5 billion – an average of 32 million per year. But in just the 12 years from 1987 to 1998, the population increased from five to six billion for an average of 83 million per year, or 18 million more than previously increased in a century."

"As seen on the below graph,60 the global explosion of population since 1900 has roughly tracked the rise of the oil age, and since the mid 1980s, has exactly mirrored the growth in crude production. Why are these facts significant when discussing peak oil? Because far and away the primary driver for the “Green Revolution” have been its petroleum-based inputs; without these inputs it would be impossible to generate the volume of produce per acre of ground we currently enjoy. If petroleum inputs decline, so too will the ability to produce food, and at a correlation comparable with the ascension." pp. 21 - 22
"Next, notice the graph below depicting the oil depletion curve presented by Dr. A.M. Samsam Bakhtiari, former senior executive at the National Iranian Oil Company, at the International Oil Conference in Copenhagen, Denmark on December 10th, 2003.62 Particularly note the barrels of oil projected for the year 2020 – approximately 55mbd. Now look back up at the World Oil Production and Population graph, and read down the right hand column and find 55mbd, which last occurred in 1985. Next read over to the left hand side of the graph to ascertain what the population was the last time the world saw production of 55mbd: approximately 4.75 billion. Again, note that from 1985 through 2006 the line of population increase and million barrels per day of oil production have been virtually identical. Now lets look forward again to the year 2020." p. 23
"Dr. Bakhtiari projects global production of 55mbd in 2020. Looking back to the UN population projection for the same year we find the expected population is 7.5 billion people – three billion more people to feed as the last time the world produced this amount of oil. I chose this model to demonstrate (though there are many others with similar projections) because of the location of the peak: the year 2006. When one considers that in 2003 Dr. Bakhtiari predicted that the peak would occur in 2006 and at approximately 83mbd – and then combined with the fact that since June of 2004 global production has plateaued at approximately 85mbd63 (more on that in a subsequent section) – his projections of future production must also be given serious consideration." p. 23
"While these facts portend a dire future, a bit of encouragement might be in order: man’s capacity to solve challenging problems. As has been the case since the dawn of mankind, when faced with overwhelming problems, man is capable of great feats: there’s nothing like the prospect of one’s death to focus the mind. There is little doubt that when the reality of the decline of oil begins to soak into the public consciousness, the best efforts of our finest minds, national governments, and billions of dollars of investment will materialize and mitigating solutions will be found. However, even the good news is tempered: the longer we wait to begin that intensive effort and significant investment, the narrower the gap between discovery of the problem and the onset of its consequences." p. 25
"The IEA now expects demand for oil to rise by 1.7 m barrels a day this year compared to last year – an increase of about two per cent.”69 But as shown on the above graph, there has been no increase for almost three years." p. 26
"Less than a month later another Financial Times article reported that a combination of tightening supplies and faster-than-expected depletion in existing fields was causing alarm among many in the oil industry. “In its starkest warning yet on the world’s fuel outlook, the International Energy Agency said ‘oil looks extremely tight in five years time’ and there are ‘prospects of even tighter natural gas markets at the turn of the decade’. The IEA said that supply was falling faster than expected in mature areas, such as the North Sea or Mexico, while projects in new provinces such as the Russian Far East, faced long delays. Meanwhile consumption is accelerating on strong economic growth in emerging countries.”69.4 If demand is increasing faster than expected, supplies are being used up quicker than predicted, and existing oil fields are depleting faster than predicted, it is possible the peak of oil may already have been reached." pp. 26 - 27
"The oil majors (ExxonMobil, Shell, Texaco, etc) do not have to view this process as antagonistic to their interests – though they presently do." p. 29
"Conclusion"
"The consistent factor in all the above was the inability of Government officials at all levels to properly assess the seriousness of the issue when time was available to take appropriate action. Had FEMA Director Michael Brown realized the magnitude of the problems associated with a Category 4 hurricane plunging into New Orleans, he would have mobilized his assets much earlier, in larger volume, and more quickly after the storm than he did; Had George Tenet really believed that Al Qaeda was preparing an attack within the United States, he would not have remained silent when Condoleezza Rice allegedly ignored his warnings; had Donald Rumsfeld listened to those that predicted the US would not be welcomed in 2003 Iraq as liberators but rather opposed as occupiers, he would have put a great deal more effort into Phase IV planning and an entirely different outcome might have played out." p. 30
"But in all cases, key officials grossly underestimated the gravity of the impending problem, even when credible information was given them that argued to the contrary. We are in just such a situation now." p . 32
"Presently there is sufficient information available warning that a problem exists, but too little detailed information upon which decision-makers could act. It is critical, therefore, that the recommendations to conduct detailed analysis previously cited be initiated immediately. We must have the most qualified experts in various fields ascertain the consequences that would occur if the global supply of crude oil began to decline as a result of depletion. Only if our leaders – and the American people – are armed with facts and information can we make the rational decisions necessary to prepare for what lies ahead." p. 32
"It is a documented fact that we failed in adequately preparing for the September 11 attacks; we failed in adequately preparing for the Katrina hurricane; we failed in our appreciation of the difficulty of post-war Iraq: we can not fail to prepare for post-peak oil." p. 32
"In closing, I include the following quotes from two reports issued this year; the first from the latest of the three Hirsch Reports, and the second from the GAO. Both of these reports will be useful to the post-peak commission that will be formed to determine how we so badly missed the warning signs before the onset of the peak. These two reports will be used as evidence that reports were conducted, measures recommended, but no action taken:" p. 32
"Hirsch 2007: It is our sincere hope that readers will look beyond the conflicting forecasts and focus on the consequences of underestimating the enormity of the peak oil problem. Effective mitigation means taking decisive action well before the problem is obvious." p. 32

"GAO 2007: While public and private responses to an anticipated peak could mitigate the consequences significantly, federal agencies currently have no coordinated or well-defined strategy either to reduce uncertainty about the timing of a peak or to mitigate its consequences. This lack of a strategy makes it difficult to gauge the appropriate level of effort or resources to commit to alternatives to oil and puts the nation unnecessarily at risk."p. 32

This leads me to think that if Major Davis can see these points, how come Daniel Yergin can't?

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Thursday, June 07, 2007

Where's Yergin's Response?

Clicking on the title of this entry and it will take you to "econobrowser" for a post mortem on Yergin's comments. Some excellent analysis has been done on the "econbrowswer" blog that puts in perspective the poor, if not comical predictions of one Dr. Daniel Yergin, the alleged number one analyst in the energy business. He's on Maria Bartoroma's speed dial and every other network news anchor.

I am referring to Yergin's comments he made in July 2005. According to him there was to be an unprecedented increase in the productive capacity of the energy industry. Some 16 million barrels per day of additional capacity to an overall capacity of 101 million barrels per day. Not only were these ridiculous predictions, they are in hindsight, the most irresponsible words uttered in the 140 years of the energy industry.

When the rest of the analysts were talking about Peak Oil theory, Yergin was the go to guy for all the press minions who didn't want to share any bad news. Repeatedly he was called upon to give his analysis of how his data, information and knowledge showed that Peak Oil Theory was bunk and that all was fine in the energy industry. As a result, the consumer, investment and business environments have this assumption about this new found capacity to expect from their favorite energy company. These expectations are completely unfounded. The deliverability of the worlds fields are in dire need of support from new fields. Fields that will have to be discovered when people realize the importance of energy in the western lifestyle. (i.e. without it were all dead) A need that has been severely retarded by Yergin's comments.

Today the industry continues to produce 85 million barrels per day and is only down 1 million barrels from its peak in May 2005. The efforts and tasks ahead for the industry are much greater as a result of Yergin's comments. The need is greater and we are 2 years further behind in a very difficult job ahead.

"Econbrowser" made another post today about who the Congress will probably accuse of price fixing the gasoline prices. I hope they find Yergin cowering in the corner of his office, too ashamed to show his face. He has a lot to account for.

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Tuesday, May 22, 2007

The peaking of Offshore Oil and Gas:

Is the party over?
Or just Beginning to get exciting?

April 30, 2007

Matthew R. Simmons

Although the majority of this information is sourced from this Simmons presentation, little specifically is referenced. I felt that most of the information was factual and therefore not subject to Mr. Simmons copyright. (You can't copyright a fact.) I highlighted only what I thought was Mr. Simmons opinions in the noted references below.

Simmons noted the significance of the earlier period of the years 1859 to the 1930's where "no one had any idea what to do with so much oil"! The 148th year of the oil era is marked this year. 70 Years ago drilling teams began hunting for oil in the Middle East. Scouting for oil in Kuwait, Iraq, Iran and Saudi Arabia. Many of the large commercial fields that still produce in that region where found. Ghawar, the biggest was discovered in 1948, Safaniyah in 1951, up to 1967 with the last great super giant onshore Middle East find being Shaybah.

During 1947 Kerr-McGee moved offshore beyond piers and brings in the era of offshore oil and gas. These initial wells reached as deep as 150' feet of water. 150 feet being the limit of human endurance and safety due to the "bends". 1967 saw the Siberian Samoltar region develop, ARCO discovered the North Slopes Prudhoe Bay in 1968, Phillips found Ekofisk in 1969 and in 1975 Pemex found Cantarell. These regions and discoveries were the last 3 great oil frontiers.

With the development of mixed gas for diving, hyperbaric chambers, and the "Jim Suit" c/w GE's robotic arm. Led to testing and drilling into 1,000 feet of water in the early 1970's. Commensurate with this deeper diving capability Drill-ships and Semi-Submersible were able to conduct drilling into 150 to 400 - 450 feet of water. Further development of sub-sea production systems led to offshore satellite fields. During the 1980's the offshore drilling industry was faced with declining returns due to the costs of these technologies and the relative decline in demand for offshore drilling due to the delcine in the price of oil. As I recall it went to $10 / barrel in 1985 or 86. The pricing problem led to what was believed as the overbuilding of the offshore drilling fleet. This lack of offshre drilling demand dropped the capacity utilization rates to 43% overall. However when 1993 saw new offshore drilling technologies being introduced, the associated declines in costs and the producers earning reasonable returns on moderate oil prices of around $18 - 21 / barrel. This led to the real deep-water / ultra deep-water opportunities. This lead to a rebound or recovery of offshore drilling when in May 1997 Sonat Offshore announced the building of a deep-water rig with a 5 year contract at $200,000 / day day-rates.

"After 1980: all growth in oil output came from offshore oil". In his presentation Matthew Simmons shows the volume of oil production increases since 1980 are attributable to the offshore drilling discoveries. 120% of the 1980 to 2007 increase in the global oil production has come from offshore exploration and production. This is significant in showing the way in which the industry should turn. If the industry was able to make these discoveries with immature technologies and imploding commodity prices, I think the answer as to where the oil and gas industry needs to turn is evident.

Today after 38 years, the contractors for offshore drilling are financially healthy and prosperous. Only the number of rigs has not changed in the last 20 years. And the vintage of that fleet is quickly realizing its useful life. Recall that rust never sleeps and the useful life issue becomes more focused. Only 15% of the total fleet is new, with the majority being 25 years or more in age. It is unknown how quickly the fleet can be refurbished and how fast the fleet could be rebuilt. Simmons asks what does 500 offshore rigs cost. With 126 rigs on order, the delivery dates being from 2008 to 2011 it would seem the drilling platforms are very limited in their opportunities for the energy industries redevelopment capabilities. Time seems to be the greater cost in rebuilding the fleet. One must recall the effort of the United States during WWII, mixed in with some modern day innovation and science in seeing how the number of platforms could be built in time. With all of the oil found from offshore wells since the early 1980's, what is the prospect of the industries productive capacity and uptake?

One of the reasons that I follow Simmons is his analysis is usually unimpeachable. He is / has been a lightning rod for the wrath of the industry soothsayers that state all is well. Dr. Daniel Yergin seems to have sampled some magic cool-aid when it comes to predicting the supply possibilities, and hence his popularity. Simmons on the other hand has consistently put quality analysis that has proven correct over time. I have been following him since 1997 and his comments are stark, to the point and not something that Yergin appears to want to wake up to. For example, in this article Simmons notes the following prospective changes with respect to the supply that Yergin thinks is going to explode in the next 10 years.

  • USA's onshore oil totals approximately 4.5 MB/D with an associated produced water of 128 MB/D. A 96.6% overall average water cut.
  • Middle Easts giant oilfield now in decline. (Based on reserve analysis and decline in production from the region.)
  • Mexico's Cantarell complex is beginning its steep decline.
  • Lake Maracaibo is a "mess".
  • Niger Delta is a rust belt of decay.
  • The North Sea is in steep decline.

In light of this and the fact that 120% of the increase in oil and gas production in the past 27 years is from offshore oil exploration and production. How is it that Yergin believes the onshore oil and gas industry can respond to today's demand challenge. If it didn't contribute in the past 27 years to the global capacity of production, what is it that Yergin believes will solve this problem? More and more each day I think that Yergin is actively attempting to impeach his history and contribution to the oil and gas industry. As time passes he will become known for getting it all wrong.

Simmons falls definitively in the category of Peak Oil Theorists. He asks if the January 2007 production profile is 1 MB/D lower then May 2005's 74,151,000 B/D. This decline may show that May 2005 was the point of no return from a Peak Oil theory point of view. Unless the number of wells that can be drilled increases size-ably, then Peak Oil starts it's otherwise impossible decline. With the associated growth in the global fleet of offshore drilling capability, production decline will accelerate.

Its at this time that Simmons puts across one of the other phenomenon he has asserted many times before. The ability to accelerate the decline by aggressive exploitation is the only thing that the industry has really done in all of the onshore and offshore fields. This has raised the deliver-ability of oil and gas from known reserves to its absolute optimum, and cleaned out what was producible form the formations quicker then what has been found to replace it. In some companies in Canada this replacement rate is consistently 15% of the production! If you see a hamster in the wheel running at full speed your correct, however, this last point demands a doubling in the speed from the hamster. Our current consumption of energy is enabled by the aggressive and highly technical exploitation of known reserves over the past 25 years. This deliver-ability rate is therefore not sustainable. And if the peak oil theory is proven right, since May 2005 a very large clock has been ticking for the energy consumer who is unawares and unprepared. Thank you Dr. Yergin.

The dire nature of Simmons facts are captured in his 27th slide. Asking "Can the industry survive post peak oil?

  • Will the global economy survive post-peak oil world?
  • How high could oil prices go?
  • When demand outstrips supply are shortages inevitable?
  • Will the Offshore Technology Conference (OTC) survive Post Peak Oil? (The OTC is the group Simmons made this presentation too.)

How this gets done, and I cannot imagine anyone arguing for the bureaucracy to lead this charge. We need to organize our efforts to scale to this level. The industry is significantly bound by constraints and needs to reorganize around this proposed software development. How much longer will we face an angry consumer regarding the alleged gouging at the pump? How much longer will the bureaucracy feel complacent and wealthy in their deliberate inaction? How much longer will Yergin continue to belittle the Peak Oil theories and Simmons, and tell his customers, the consumers and bureaucracies, things are not as rosy as he has stated?

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