Down, down, deeper and down

By Benedict De Meulemeester

By Benedict De Meulemeester on 5/09/2009

On Thursday, BP has announced that it has found a gigantic oil field in the Golf of Mexico in the so-called Tiber field. The concern estimates the field to hold 3 billion barrels of oil and that it could recover 300.000 barrels per day from 2020 on. To give you an idea, the world’s consumption of oil stands today at approx. 84 million barrels per day, which means that with this new oil field, the worlds supply would rise by some 0,3%.

This percentage in itself shows clearly that we shouldn’t interpret such ‘Hurrah’ messages from oil producers as a sign that the shortfall in oil supply that peak oil theorist predict will not occur. On the contrary, if we look in more detail at what BP has discovered, we get a good image of what peak oil ages will look like. The field lies 11.000 meter below the sea surface, which is an unprecedented depth for Gulf of Mexico oil fields. We’ll have to go down, down, deeper and down to recover oil from places never visited before.

Three years ago I visited an energy convention in Groningen, the capital of Dutch gas production. Kjell Aleklett, the Swedish president of ASPO, the Association for the Study of Peak Oil and Gas, delivered one of the funniest speeches I’ve ever witnessed at such occasions. In a deliciously provocative style, the man came to tell the audience of 300 representatives of the energy industry that they better start looking for another job. With tons of data, the man supported his thesis that gas and oil production were entering their decline phase. Hydrocarbons would become so expensive that this would force the world into adopting other energy technologies.

If you look at the development of energy markets of the past three years, you might think that Kjell was not only entertaining, but also correct. We did indeed see supply / demand tightness in all three hydrocarbon markets and we did see the price spikes that this induces, especially when speculative money starts buying the peak oil idea also. But some peak oil adherents do paint a picture that is too infested with doom to be true. Too many books on peak oil theory have a cover with a photograph of the last drop of oil. They want us to believe that we will have to cue in front of the gas station in the near future.

I don’t believe that this is what will happen. There is still a lot of oil on this planet and even much more gas and coal. The trouble is that it will become ever more technologically challenging and expensive to recover them. This will have two consequences:

  1. Temporary supply / demand crunches will occur, as producers hesitate to bring those far away oil fields into production. This will cause price spikes like we have seen in the past three years.
  2. It will also gradually drive up prices. But this will not be in the straight lines that you see on the peak theorist’s graphs. They will shake up and down ever more violently. Volatility will increase even more importantly than price.

The big question then is: how fast will this affect the energy consumption patterns of the world’s population? How fast will we start driving cars fuelled by something else than oil? How fast will we reduce our industrial and residential consumption? From which sources will we produce electricity?

What we have seen in the past year is that demand corrections cause rapid price declines. Markets go down even faster than they go up. In the long term this is probably bad news for the supply and demand balance. Already, more than a third of all projected investments in oil and gas production have been shelved as they have become uneconomical at current price levels. The question then for BP (and for the many people that bought BP stock on the news of the oil find this week) is:

Can you produce 70 dollar per barrel per oil from a place 11.000 meter below sea surface?

Keep up to date with E&C