CERA and the Myth of Peak Oil Theory, Part II

Cambridge Energy Research Associates Inc. (CERA, for short), of Cambridge, Mass. has released a so-called "new analysis" of Peak Oil theory, concluding that Peak Oil is a "simplistic model based on flawed logic and incomplete data that has consistently produced inaccurate forecasts." But if you want to read its new analysis, you have to buy a copy of it from CERA.

But if you do not want to send your dollars to CERA, I will provide a summary of some of CERA’s previous statements on Peak Oil. This is purely in the spirit of allowing CERA to have a forum that includes its nonpaying clients. I will offer here some other details on what CERA has said about Peak Oil in the past.

On Dec. 7, 2005, a person named Robert Esser, who is associated with CERA, testified before the U.S. House Energy and Air Quality Subcommittee hearing on "Understanding the Peak Oil Theory."

In summary, Mr. Esser noted that the term Peak Oil "is not a very helpful concept, nor one that provides much descriptive power. Rather than an imminent ‘peak,’ we envision an ‘undulating plateau’ two-four decades away. We at CERA have been conducting continuing research on future oil supplies, working up from a field-by-field basis."

Mr. Esser noted that the issue of future oil supplies:

"is an issue that needs most serious consideration. After all, the planet has a finite resource, and the world is consuming 30 billion barrels a year. But the understanding of the situation needs some clarification. Key considerations include technology, economics, timing, fiscal and regulatory terms, and a comprehensive understanding of current and future productive capacity. As we see it, the model for Peak Oil has been and continues to be flawed. The resource base is still poorly understood and it appears to continue to expand."

While I want to give ample forum to CERA’s claims, I should note at this point that most of the "expanding" resource base is due to Peak Oil critics redefining the word "oil." It used to be that gooey stuff that flowed out of the ground from a well bore. Now the term "oil" has expanded to include immense volumes of resources such as heavy oil, tar sand, oil shale, and even coals (in terms of using coal to make liquid fuel). The problem is that the recovery of these resources is quite energy inefficient. It takes almost as much energy input to obtain liquid fuel from these energy-diffuse sources as you obtain energy output from them. This gets into the concept of energy return on investment (EROI), which we have discussed previously in Whiskey & Gunpowder.

Mr. Esser then listed, in his testimony to Congress, six "key points" on which CERA is focused, namely:

1. The world is not running out of oil in the near or medium term. Our field-by-field activity-based analysis points to a substantial buildup of liquid capacity over the next several years.
2. An increasing share of supplies will come from "nontraditional oils" -- from the ultra-deep waters, oil sands, natural gas liquids, gas-to-liquids, coal-to-liquids, etc. As time goes on, these "nontraditionals" will become more traditional.
3. Rather than a "peak," we should expect an "undulating plateau," perhaps three or four decades from now.
4. One reason for the pessimism about future supplies is that the reserves disclosure rules mandated by the Securities and Exchange Commission are based upon three-decades-old technology and need to be updated.
5. The major risks to this outlook are not below ground, but above ground -- in such forms as political turbulence, abrupt changes in contract terms, and controversy over fiscal terms.
6. Meeting the energy needs of a growing world in an environmentally sound fashion will be a major challenge. Doing so will require substantial investment and continuing technological innovation and will more likely be achieved through an open global economy.

"Are we running out of oil?" asked CERA’s Mr. Esser rhetorically to the subcommittee of the U.S. Congress. And then he provided an answer:

"CERA’s belief is that the world is not running out of oil imminently or in the near to medium term. Indeed, CERA projects that world oil production capacity has the potential to rise from 87 million barrels per day in 2005 to as much as 108 mbd by 2015. After 2015, we see further growth in capacity. Our outlook contradicts those who believe that Peak Oil is imminent.

"Although there have been recent downside factors, such as the slowing rate of expansion of capacity in Russia and continuing problems in Iraq, this is balanced by a more positive outlook for major producing countries such as Angola and Brazil, where a stream of large projects continues. In addition to crude oil from conventional settings, our analysis concludes that unconventional oil -- condensates, natural gas liquids, deep-water production, extra heavy oils, and gas-to-liquids -- will represent about 35% of total capacity in 2015 -- compared to 10% in 1990."

This latter point goes back to the notion of redefining the energy problem with conventional oil, by expanding the definition to use other substances.

Mr. Esser made reference, in his congressional testimony, to CERA’s database of oil field and production statistics and to CERA’s methodology. He outlined many of the underlying assumptions that CERA uses. He made numerous country-by-country forecasts, for both OPEC and non-OPEC nations that produce oil. And he stated certain of the risks that are built in to the scenario for future oil production. What can go wrong, according to CERA? Here is the short list:

"Elements of risk involving existing project problems, annual maintenance, new project delays and attrition, and the timing and scale of appraisal and exploration projects. But there is another group of major risks that will materialize. While there is uncertainty about decline rates and the scale of contributions from new projects and exploration, CERA believes the risks to capacity expansion are mostly above ground: People, rigs, yard space, and raw materials are in very short supply; costs have been driven up; and the situation shows no sign of easing. This will limit the expansion of the exploration effort and slow the rate at which new projects will be sanctioned. Other aboveground risks are:

• Operational risks exist, especially in extreme environments such as ultra-deep water, where the cost base and the subsurface risks are also higher.
• Weather and environmental effects can be broad and unpredictable. The impact of hurricanes Katrina and Rita are still being felt in the U.S. Gulf Coast, where some 0.54 mbd of production is still shut in.
• Creeping nationalisation and reconsolidation is occurring in key producing countries.
• Resurgent nationalism in some countries is creating considerable turmoil and increased risks for both international oil companies and the now better-positioned national oil companies.
• Tightening fiscal terms in response to higher oil prices and policy changes where governments and NOCs do not see inward investment as absolutely essential are an ongoing risk.
• Violence and insecurity is having an impact on production capacity in some areas."

Mr. Esser’s testimony to Congress made reference to what he labeled as "The Specter of Peak Oil." And then he appended the note, "What Peak?" According to Mr. Esser, CERA’s outlook "shows no evidence of a peak in worldwide oil production before 2020." And then he adds that "It is true that total annual global production has not been replaced by exploration success in recent years, but production has been more than replaced by exploration plus field reserve upgrades." A lot of people believe quite differently on that one.

"Although oil is a finite resource," said Mr. Esser, "we still do not have an exact estimate of total reserves; meanwhile, global resources should continue to expand. Many basins, even those producing significant volumes of oil, remain underexplored."

A good many of the things that Mr. Esser said to the subcommittee of the U.S. Congress are technically correct. For example, the "undulating plateau," the SEC definition for reserves, and the political and other "aboveground risks" are all very good points. They are also part of the very intelligent discussion that occurs whenever a group of Peak Oil aficionados gets together. And in an effort to "understand the situation," the recent ASPO Boston conference included quite a bit of review of the "key considerations [of] technology, economics, timing, fiscal and regulatory terms, and a comprehensive understanding of current and future productive capacity." So these CERA benchmarks were all points of discussion at the ASPO and high in the list of concerns of that allegedly "flawed" Peak Oil theory. It is not as if CERA has some monopoly on the magic elixir of understanding oil depletion issues, or the secret-decoder ring without which all others are flailing about in the dark.

And nobody from the Peak Oil school really believes that "the world is…running out of oil imminently or in the near to medium term." That is a pure "straw man" kind of argument, because I have never heard any real Peak Oilman (or -woman) say that. The world’s oil industry will still pull oil out of the McClintock No. 1, a well drilled south of Titusville in 1861 (a couple barrels per month, but it is still coming through, 145 years later). And the world’s oil industry will be extracting large quantities of oil from the ground for a long, long time. But -- and here is the take-away point -- just not enough to meet anything like the projected levels of demand going forward. So the future will not be just a glossier imitation of the past. Will the future be a James Kunstler-like vision of decline due to the Age of Oil passing most of us by? Or will the future be a more optimistic vision of people simply changing their consumption habits and motoring happily down the highways of the future? Good questions.

Too bad nobody from CERA bothered to show up at Boston University and contribute to the discussion. Perhaps the viewpoint from CERA could have helped to dispel the "simplistic model based on flawed logic and incomplete data" that most of the other ASPO speakers were allegedly presenting.

And a CERA representative might have offered to explain to the ASPO conference how, in the face of a minimum of 4% annual oil depletion rates on a worldwide basis, CERA can forecast that oil extraction will increase "from 87 mbd in 2005 to as much as 108 mbd by 2015." Is CERA really making the case that the world’s oil industry is "discovering" sufficient new reserves, on an annual basis, to replace not just the output that is depleting, but also finding enough new extractive capacity to increase daily oil production by about 35% within the next 10 years? If so, I must have missed those upbeat articles when I was reading my copies of Oil & Gas Journal during the past few years.

If the CERA dismissal of the Peak Oil perspective is valid, I would like to see some facts to back it up. The Peak Oil people tend to put their cards face up on the table and let the readers follow the facts. At the recent ASPO conference, for example, one of the most compelling speakers was Matthew Simmons, who has devoted many years to reviewing the facts behind the world’s oil predicament. He has the slide show to prove it. But of Mr. Simmons, no less than Daniel Yergin, one of the principals of CERA, is on record as saying, "He’s wonderful at stirring up an argument and slinging around rhetoric...For some of these people, it seems to be a theological issue."

A "theological issue"? Well, that’s a new one that takes the prize. But I suppose that different people pick up on Peak Oil for different reasons, and maybe some people think that Peak Oil is important because they do not want to meet God before their time. But most people, in my experience, begin to worry about Peak Oil because it is a concept that has factual support and makes sense.

Makes sense? Peak Oil actually explains quite a bit about what is going on in this world of ours. If you are interested, I will sell you my report on the subject. (No, just kidding. Keep on reading Whiskey & Gunpowder, and I will explain it to you. And send your note of thanks to the publisher, Bill Bonner.) Once people start to comprehend what Peak Oil is all about, they begin to ask where do we go from here, as individuals, as a group, as a nation, and as a world. And this kind of publicity for the subject matter works against the interests of people who want to keep their knowledge bottled up and tell everyone that you have to be some sort of "expert" to really understand it. It is almost like the Peak Oil debunkers are saying, "The future of the world’s energy supply is a really important issue, but you are not worthy and cannot know about it because you might not understand."

And so, dear readers and many friends, it is time to bring this article to an end. I hope that no one will accuse me of not correctly spelling the name of my subject for the day. Again, it is Cambridge Energy Research Associates, Inc. (CERA). There is, after all, no bad publicity. But will CERA someday be recognized as a farseeing prophet of the perils and passions of Peak Oil? Or will CERA become the Paris Hilton of the energy consulting gig? Only time will tell. Meanwhile, thank you for reading Whiskey & Gunpowder.

Byron W. King

• CERA and the Myth of Peak Oil Theory, Part I

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Related Articles:

• None Found