Wednesday, January 23, 2008

20,000,000 Per Day Production Gap Looming

I can understand why almost no one gets it with the approaching perfect storm in the Oil industry.

Just as we find it difficult to understand compound interest, it is difficult to imagine the collapse of an industry built on a declining resource, even when everyone is in it. Grand banks cod was destroyed for that same reason as was the whale oil business. Yet everyone operated with a business as usual stance to the day it ended.

I hate scaring people, and it is clear that the political leadership is tiptoeing around the issue in every way it can. No one wants to say 'hey guys, the crap is going to hit the fan like it never did before'. I am certain that George Bush is hoping to be long gone before the shoe drops. 'just give me eleven more months, lord, so that I don't get blamed for that too!'

When the first oil crisis occurred in 1975 or so, there was no mystery were the oil was going to come from. There were ample supplies in Saudi Arabia for the turning of the tap.

Today there is no tap to turn and the Saudis know that they are now facing decline if it has not already commenced. Yet even they are pretending business is as usual.

No matter. Our current annual production level of 85,000,000 barrels per day is about to decline at around 4,000,000 barrels per day per year for several years. We have to to be ready to open up new production at this level each year to just stand still. Right now we simply cannot do it.

Accelerating current production of established operations simply will not be possible and has never been possible in the oil business. In fact, you maximize production volumes by slowing the actual lifting rate. For sure, that is why the Saudis have already lowered their output levels.

Recall that thirty five years of very high relative oil prices has not halted the decline in US oil production.

Right now the THAI pilot operation in Alberta is ramping up to 100,000 barrels per day as fast as humanly possible. That will take at least two years to commence and about two years to build out. Accelerated permitting can then build out an additional 900,000 barrels over the next three years. So in my most aggressive back of the envelope scenario, THAI can hit 1,000,000 barrels per day by 2012 at the earliest. At the moment we still do not know what a real world depletion and decline curve looks like for the THAI well pairs. We will though by 2012.

However, once that is well underway, it should then be easy to add an additional 1,000,000 barrels per day per year for a long time. It may even be possible to ramp up to 4,000,000 barrels per day per year over the succeeding five years so that by 2017 we are recovering back to current levels of production.

In my most optimistic scenario, which is becoming available to us thanks only to THAI, we will lose about 20,000,000 barrels per day of production and then slowly creep back to current levels by 2018. That is a pretty ugly swing however stated.

And yes, throughout this transition, it will be possible to scramble in resources, including a lot of oil that will also alleviate the pressure.

This scenario suggests that Alberta must achieve production levels of an unbelievable 20 to 30 million barrels per day within the next two decades. This is a billion barrels or so per year. And strangely enough, from what I know of the actual resources, this can be sustained for a thousand years at least although the rest of the world will dry far sooner.

I also suspect that undiscovered mega fields may exist in the remaining valley of the MacKenzie although most folks would rather go to the middle of the Amazon.

In other words it is impossible to understate the importance of the successful pilot test of the THAI system. All the major problems associated with heavy oil disappear, including maximizing recovery. For the record, I have been watching this pilot since before they got the money to do the pilot test, and so far it has succeeded as advertised with only the usual predictable problems. Expect engineers to skimp on sand handling when you don't quite believe that the underlying premise is going to work. The courage to immediately permit a next stage to 100,000 barrels per day is a huge internal vote of confidence that the technology is licked and is truly working.

Let us hope that my optimistic scenario ends up been the global production floor. This still means that the personal automobile is almost going to be banned as that is the only place that we can remove 20,000,000 barrels per day of production. There is no other source until THAI and even replacement technologies kick in.

I personally hate to write posts about the developing economic situation, but shared knowledge is the only way to be able to position yourself in the middle of a pending economic transition crisis. Otherwise one freezes up in the face of rapid changes which rather obviously have already begun.

You need only imagine the post that I would have to write if THAI was not working, particularly since few comprehend the lead times necessary to bring on new technologies like algae oil and methanol at the scale necessary.

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