When will It Reach the Peak of World Oil?

When will It Reach the Peak of World Oil? – In this section and the next few articles, we will talk about The Petrodollar and the Geopolitics of Oil which is part of Tesla’s Revolution as the leader of the electric car company today. To understand more, we recommend reading the following article – and the series;

Is Wind Energy a Great Success as Well?

Oil and Power — Who’s More Powerful?

Oil after the Second World War

The war in Iraq after 9/11 was about oil?

Oil Play a Role in the First Gulf War

Petrodollar Causes Many Wars

Oil is a Weapon in a Financial and Economic War

Natural Gas Play a Role in this New ‘Cold War’

World Oil Production Has Not Reached Peak

When will It Reach the Peak of World Oil?
Credit: CBC

When will It Reach the Peak of World Oil?

Over 70,000 oil fields have been discovered worldwide. Most have been brought into production, and many have already passed their peak production level and produce less every year. Since the finiteness of oil expresses itself in a pattern of growth, peak, and decline, the oil industry has to add new oil fields continuously to current world production, otherwise total production will fall. Where possible, oil companies try to stave off the peak in already producing fields, or even temporarily reverse the decline by using new production techniques, but this can only do so much. Thus the higher production is, the more new fields need to be brought into production every year just to maintain production levels.

The International Energy Agency (IEA) in its latest 2015 outlook estimated that by 2030, 45% of 2014 production will need to be replaced by oil from new fields. This is because conventional oil production from large existing fields, once they have peaked, declines on average by 6.5% per year, and for smaller fields the decline is above 10% annually. It’s why the oil industry invests globally over $600 billion every year to maintain oil production. In 2005 the global oil industry invested only $130 billion in exploration and development, and about $100 billion on average during the 1990s.

Conventional oil production is declining in a growing number of oil-producing countries. The onshore production in 25 out of 39 countries is declining where production either still is or once was above 100,000 barrels per day. And similarly, offshore oil production in 24 out of 34 countries with either current or past significant historic production levels is in decline (Figure 1). Recently onshore China has been added to this group with production first stabilizing and now declining as the supergiant Daqing has reached its declining phase.

When will It Reach the Peak of World Oil?
Figure 1.

The last large new cheap-to-extract province was the North Sea. Exploration started there in the 1970s due to oil security concerns and increasing oil prices. The large discoveries of 60 billion barrels were quickly exploited and were already exhausted by the late 1990s, when production peaked at 6 million barrels per day in the UK, Norway, and Denmark. Today these countries only produce 2.9 million barrels per day together.

Despite recent high oil prices, no new North Sea oil has been discovered with oil that can be extracted at a cost less than $20. Total oil discoveries have continued to decline despite oil price growth, and in the last five years we produced four times more oil than we discovered, with about 43% of discovered oil coming from deep sea costly-to-produce fields.

We can also see that high oil prices have not done much to squeeze more oil out of existing fields. Both onshore and offshore production in countries that have peaked each declined by over 2 million barrels per day between 2008 and 2015. Only a temporary respite is visible for 2014/15 in Norway and the UK due to recent one-off discoveries that came online (figure 1c). And the continued conventional oil production growth in other countries was not sufficient to compensate for declining countries. Conventional production has peaked and is declining. 

So the only way to continue postponing peak oil is to continue production growth from unconventional sources, and to do it faster than declines in conventional oil fields. Today the world produces about 19 million barrels per day from costly-to-extract unconventional fields, and this would need to grow by at least another 2.5 million barrels every year, so as to grow oil production (figure 2). A key source of oil in recent years has been shale oil produced in the United States and Canada that comes from shale rock reservoirs that provide much less easy flowing oil than conventional oil fields.

When will It Reach the Peak of World Oil?
Figure 2.

The amount of oil in the ground from unconventional sources is vast, especially tar sands, shale oil, and extraheavy oil that doesn’t flow. Since unconventional oil comes at a high price, the drop in oil prices between 2014 and 2016 has moved the target for peak oil much closer. 

In reaction, almost 70 oil projects, especially deep-sea and tar sands, have been postponed, which would otherwise deliver an additional 2.8 million barrels per day by 2022. The total investment in oil and gas exploration and development dropped by about $250 billion in 2015/16. The last time this happened was after the 1980s oil crisis.

In Canada, the largest tar sand producer, capital spending dropped by 62% or $31 billion from 2014 to 2016. Balance sheets of oil majors in 2014 clearly show the need for at least $80 per barrel to break even, and require $50 to $60 to stay cash flow neutral.

The energy analysis firm Rystad Energy—based on their database of 65,000+ oil fields—has calculated that oil prices have to be over $60 per barrel to grow oil production again. At best, oil production will remain stable in the next years. Since it takes seven years from investments in deep-water, tar sands, or extra-heavy oil to first new field production, the investment downturn has a long-lasting impact.

There are two possible scenarios that could unfold for world oil production now;

  • The optimistic scenario heralds that high oil prices will lead to renewed high investment in unconventional oil. Since a majority of new projects require $60 to $80 per barrel to warrant investments and provide profits, oil prices will have to remain consistently above $60 per barrel for this scenario to happen.
  • The pessimistic scenario is that production will decline as investments continue to fall short. The declines in conventional production will become too large, with especially the Middle East disappointing in growing its production.

Based on these trends in global oil production, we could see large volatility in oil prices till at least 2020. But within five years, the Tesla Revolution could be well underway, with many electric and hybrid cars flooding car markets. What many do not realise is that this is a self-accelerating process. Once electric cars start to have a major impact on oil demand, companies will make fewer investments in oil supply. Less oil will come to the market, which will spell a new era where the oil market is no longer driven by rising oil demand but the reverse.

1 thought on “When will It Reach the Peak of World Oil?

  1. Pingback: Is the Era of Cheap Oil Over? | mech4cars

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