Oil Dependancy

The one thing that I have been emphasizing with my readers is the onset of something known as peak oil. Although everyone knows that the globe gets the majority of its import oil from the Middle East, most poorly appreciate just how much of our conventional reserves actually reside there. We all know that the largest single conventional reserve is in Saudi Arabia. What few appreciate is that number 2,3,4 &5 are not that much smaller and are all in the same Persian Gulf Basin. This means that the bulk of conventional reserves are in the Persian Gulf.

What is more important, is that they have all been exploited for decades and are all past peak or at least certainly appear to be. They are also easy to exploit, so there should be little recoverable residual oil to go after in depleted fields. The only remaining mystery is to what degree the owners are not disclosing field performance. This is a contentious issue and a serious concern and certainly, no one believes that they are telling the truth, particularly when they change quoted reserves at a whim. However, with the Saudis essentially cutting production, it is a very good bet that increases are now impossible.

Looking at the combined reserves in the Middle East it is hard not to believe that an increase is merely a snap of the fingers away. But it is not. Oil fields must be pumped slowly or they will physically deteriorate. And these wells and fields have been carefully managed for a long time and are certainly maximized.

I am reminded of a very greedy stupid individual that I knew whose brother bank financed the acquisition of a very productive gas well in the USA. He then proceeded to kick his brother out of the deal and then took over management of the well. It was a moment's effort to crank up the production rate to accelerate the payback. It took three days for the the well bore to become sand packed, cutting of all production. There was nothing to say after that.

The only other great exploitable oil resource readily available is the Alberta Tar Sands, similar in scope to the whole Persian Gulf and probably much much larger. I also suspect that we have not heard the last word of the conventional reserves of the related Mackenzie basin. But like the heavy oil reserves in the Amazon, access is a true bitch. Right now you have to be utterly determined and be prepared to operate in conditions similar to the North Slope over road less rugged terrain in the dead of winter.

The Alberta lands are much more accessible and the necessary infrastructure is already in place permitting incremental additions to production. This is why THAI is so utterly important to the future oil supply situation.

It turns an unconventional bitumen resource into a near conventional resource, although I can hear the howls of oil men everywhere. The fact that the successful use of a burn front adds value in terms of upgrading the production fluids while also obviously utilizing the production CO2 to mobilize the oli is an elegant resolution of an impossible problem. That it actually appears to be working is a modern day miracle. When I first saw the proposal, I thought that it was too good to be true. today, the only remaining question is well life and there is only one way to figure that out.

And with a next phase kicking in at 100,000 barrels per day, it is safe to say that the proponents are now total believers.

Thus we are left with an open mystery as to when the Middle East will find its production seriously collapsing, which some see as imminent. The advent of THAI can in time bridge this production shortfall provided the Middle East retains the capacity to maintain current levels. This is an extremely questionable assumption currently shared by no one.

You will notice that I make no suggestion that we can support actual increases in production. We will be extraordinarily lucky if it is possible to sustain current levels while high prices drive THAI production and a slew of alternate fuel sources.

We have high prices now. There is no more encouragement needed. A price burst upward will more reflect a sudden loss of production somewhere than anything else. The fact is is that we are now very vulnerable. And as I have said, our true strategic reserve is the automobile.

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.

Transition to THAI oil production

Now that Thanksgiving is over, I think that we are facing a true winter of discontent. The global economy has to absorb and adjust for several uncomfortable changes over the next year. I am personally a perennial optimist but also a realist.

We have to overcome a shrinkage in US purchasing power known also as credit, brought on by the unraveling of the sub prime lending business, while the global economy is now eating an energy tax in the form of much higher fuel costs. This is not funny.

What is more, there is little reason to think that the credit decline will not be felt globally. Institutions are taking hits everywhere and they simply will not have as much liquidity. Remember that it was excess liquidity looking for a home that created this mess in the first place. And real estate price inflation took place just about everywhere.

We can thus expect a rolling squeeze on borrowers lasting about three years or more as inventories are unwound. I personally think that there is enough global liquidity slopping around to sponge up the excess housing inventory in the US within three years or very quickly.

Higher energy costs will impact everywhere, but in the US in particular. There is plenty of room for a recession style contraction in the economy that cannot be bailed out this time with cheap money. It is already dirt cheap.

The best scenario is for the oil price regime to stay generally neutral over the next three years while the credit markets work through their problems. In spite of the heated press. the credit situation will work itself out because the global economy will continue to expand for at least another generation or two simply because of the transition to a global middle class modern economy.

A shift in the price of oil to $200 per barrel will surely precipitate a serious recession. The problem is that looks as likely as a decline back to $60 per barrel. In the meantime, the industry and the users are all in denial. New discoveries now are still far too few, although they are been made, and they all need decade long lead times to become productive. The necessary wells that should have been discovered over the past fifteen years were not made.

The only technical fix that is even on the horizon and looks like it may be implemented is the THAI production protocol. It actually looks like the second coming of the oil business. although few have heard of it.

Right now it is been successfully tested on the deep tar sands in Alberta. Three well pairs are now sustaining 2,000 barrels of fluid per day with a water cut of around 50%. They have all started in the past eighteen months. They are currently shaking out the sand handling problems and perfecting the process. Two more years of production should see theses wells paid for. I do not know how long the wells will operate until the available resource is properly depleted and I am sure that the operators do not know either.

The real payoff, however, is that this protocol can be rolled out on thousands of wells just on the tar sands. And there are negligible inputs required unlike the mining protocol. And it can really be done very quickly in Alberta.

This exact same technology can be applied in theory in every other oil resource in the world and can lead to the recovery of huge amounts of left behind oil.

The creation of a pyrolysis front in the oil bearing formation upgrades and mobilizes the bulk of the remaining oil all0wing it to flow readily to the production well. If the oil cannot escape, it is likely to be burnt providing process energy.

Unheard of seventy percent recoveries are been touted by the project promoters.

If THAI fails, then the oil option will continue to evaporate and quickly. Right now, we are trying to get through the next several years while facing pending production declines.

Michael Klare and Oil Insuffiency

This rather excellent article can be found at:

http://www.alternet.org/audits/66625/

Preparing for Life After Oil

By Michael T. Klare, The Nation. Posted November 8, 2007.

Welcome to the Age of Insuffiency: As oil prices hit new highs and supplies sink, our way of life will drastically change.

This past May, in an unheralded and almost unnoticed move, the Energy Department signaled a fundamental, near epochal shift in US and indeed world history: we are nearing the end of the Petroleum Age and have entered the Age of Insufficiency. The department stopped talking about "oil" in its projections of future petroleum availability and began speaking of "liquids." The global output of "liquids," the department indicated, would rise from 84 million barrels of oil equivalent (mboe) per day in 2005 to a projected 117.7 mboe in 2030 -- barely enough to satisfy anticipated world demand of 117.6 mboe. Aside from suggesting the degree to which oil companies have ceased being mere suppliers of petroleum and are now purveyors of a wide variety of liquid products -- including synthetic fuels derived from natural gas, corn, coal and other substances -- this change hints at something more fundamental: we have entered a new era of intensified energy competition and growing reliance on the use of force to protect overseas sources of petroleum.

________________________

This article gets all the numbers and facts on the record without been hysterical about it. That option is left to us. I think that we all know that we will not be adding major new production let alone replacing declining production, anytime soon. What has actually happened is that the declines have finally caught up to the oil companies' scramble to produce new oil. When a wolf pack finally runs down a deer, it is silly to think that there is anything left in the tank to fix the problem.

Astonishingly the public is still in total denial as are the political leaders. And perhaps why not. They will face a massive readjustment and it will be uncomfortable and there will be a real struggle to adjust priorities. But in practice it is going to mean that sooner or later, you are going to park your car and utilize alternative transportation.

Those who have followed my carping on the eminence of this painful transition can work their way through the five page article and get fully briefed. The bad news is that it is all true and cannot be fixed.

Everyone forgets that the first oil crisis came about with the peak of US oil production and was actually fixed because Middle East Oil could quickly match demand at $20.00 per barrel.

Today, it is theoretically possible to match demand at $100 to $200 per barrel but not quickly.
That is a huge difference from the seventies when OPEC was showing their strength but their capacity to produce was never in question. Today it is very much in question. In fact, they are likely lying to boot.

Strangely enough there is one possible way that we may be able to extend the age of conventional oil very quickly, although I am loathe to promote it to loudly. I am rather inclined to see the massive conversion to successful carbon neutral bio fuel technologies in my lifetime because it is important that this happens.

Readers are invited to read the recent disclosure statements of Petrobank(PBG.TO)

The company is operating a clearly successful pilot test of the THAI process on deep bitumen based oil. In a nutshell, it has become possible to use a well pair to consistently drain a reservoir at the rate of 1000 upgraded barrels per day. 7api is delivered as 16api which is a huge break. And all the process energy is produced underground with no significant additives.

The reserves available to this new technology is likely almost all the tar sands not now declared as reserves. Since the declared reserves are around 375 billion barrels out of a resource that is thought to be 1600 billion barrels, we are saying that over one trillion barrels needs to be reevaluated.

Since this type of production is not needing any additional natural gas or the like to be built out, the actual roll out can be almost as quick as conventional oil in Alberta. Recall that the three well pairs currently been operated have only been in the ground for about a year. The placement of proper sand handling equipment will allow capacity production. This is under way.

Thus a mere 1000 well pairs draining very small acreage can establish sustained 1000 barrel per day production each which is a million barrels per day. This is completely within the current capacity of Alberta's oil industry. And it can be done year after year displacing the anticipated 30,000,000 barrel global shortfall over the next thirty years.

Of course, at that rate of depletion, even the Athabasca tar sands can be fully depleted within this century. Of course we will still have the same type of resource in South America and there are many additional forgotten strat traps holding this stuff around the world. The method may even work on the Green River oil shales though I am not very optimistic. In the meantime, the tarsands will always be better, particularly since we are mastering them.

$300 oil and all that

Our current global oil production and consumption is running at 88,000,000 barrels per day. In 2015 we will need 98,000,000 barrels per day. In that seven year period we know that current production is likely to decline, perhaps by as much as another 10,000,000 barrels per day. This is what global peak oil looks like folks. Nobody is able to add significant new production anywhere and they are trying hard.

This is a 20,000,000 barrel per day volume swing that must now be accommodated by forced rationing through the market. Global production must stabilize at a level were replacement remains possible. There is no evidence to suggest that the current levels of production can be replaced. The Tar sands are good for a portion of this shortfall but still only a fraction of it. All other new production is very deep and very expensive and cannot be delivered for years.

If the oil industry spent every dime they ever had on new oil, they could not catch up. It took us a hundred years of full out investment to establish 88,000,000 barrels of daily production. We must now create 20,000,000 barrels of daily production in seven years.

The only place it really can be done is in the squeezing of the last oil out of the major historic fields through the application of massive capital. THAI (toe and hell air injection ) will come into its own in this environment. But this all takes a price regime that supports such a massive jump in capital investment.

That is why we are going to see $300 oil very soon. The market only requires an excuse now.

The modern automobile must come off the road as quickly as possible. $300 oil will do very nicely in changing peoples habits. And I hate to even say it, but rationing will become necessary. There simply will not be enough oil available at any price to allow luxury transportation. Goods transportation must take priority.

We could maintain our consumption rate if the the daily volume can be stabilized and we let the market slowly prioritize usage. With heavy capital investment, this current level could be sustained for another 10,000 days before all the difficult oil is pumped out or mined and used. It remains that we will be doing economic handstands while this is happening since every addition to oil production must now be planned years in advance, while every reduction will be 'unexpected'.

I am in charge of the permitting of a very deep wildcat gas and oil test up in the mountains of Utah. It is one of the last untested bits of the huge Uinta Basin. The lease was available because it was part of the Ashley National Forest. The cycle will take a minimum of three years to complete before a drill can hit the ground. If we desperately needed that resource next year I could not help at all. Yet the information that I am looking for could be proven out in four months of work with a drill and a drilling bond for restoration.

I also know of a highly likely onshore billion barrel oil field. Without a proper deal and guarantees it will stay in the ground. I do not think any of this will change with $300 oil.

The major point that I want to make is that we are shaping up for a repeat of the 1978 - 1982 oil crunch that distorted the global economy and we are far less well positioned for this. There is no Saudi Arabia able to increase production at will. We have conversation and lies instead.

This is also likely to trigger a major downdraft in securities markets as investors try to figure out who the winners and losers are. It will take the auto industry around four years to retool to adjust to the new price regime. The baby boomers retirement is likely to be on hold.