“We are betting our entire national economic life on the hope — indeed the expectation — that the fracking boom will continue until well into the 2020s, and that, at a rate and cost we desire, significant amounts of ‘yet to be discovered’ oil will somehow be found to meet the demand.”
“If any of that proves incorrect, we have no plan, no alternative, and have given no thought to how we would respond in such a case.”The speaker is national-security expert Lieutenant Colonel Daniel Davis, a veteran of four tours of duty with the US Army in Iraq and Afghanistan. I am not a military man, but I worry just as much about the energy security of my own country as he does about his. In the UK, the government, the civil service and most of the big energy companies seem perfectly content to replicate the grand gamble under way in the US.
On 10 December, Lt Col Davis and I convened video-linked gatherings in Washington and London of people who share our concerns about the risk of a global oil crisis. We also invited key people who don’t, but who were interested in probing beyond the propaganda that energy-policy discourse seems to attract these days. [Two powerpoints, and Agenda / Participants / Transcript of first half are appended below.]
Those joining us included retired military officers, security experts, senior executives from a wide spectrum of industry and politicians of all the main parties, including two former UK ministers.
We began with a presentation by Mark Lewis, a former head of energy research at Deutsche Bank. With this background, you might expect Lewis to be a disciple of the conventional narrative of plenty in oil markets. Many of his peers are. But he suggested that three big warning signs in the oil industry point to a counter-narrative of impending problems for supply: high decline rates, soaring capital expenditure and falling exports.
The decline rates of all conventional crude-oil fields producing today are spectacular; the International Energy Agency projects output falling from 69 million barrels per day (bpd) today to just 28 million bpd in 2035. Current total global production of all types of oil is some 91 million bpd.
Consider the spending needed to try to fill that gap.
Capex for oilfield development and exploration has nearly trebled in real terms since 2000: from $250bn to $700bn in 2012. The industry is spending ever more to prop up production, and its profitability is reflecting this trend, notwithstanding an enduringly high oil price. Meanwhile, consumption is soaring in Opec nations. As a result, global crude-oil exports have been declining since 2005. It is difficult to conflate this data and not see an oil crunch ahead, Lewis concludes.
What of the recent addition of two million bpd of new oil production from American shale: the boom that has even been cast as a “game-changer” and a route to “Saudi America” by industry cheerleaders?
Geological Survey of Canada veteran David Hughes, who has conducted the most detailed analysis of North American shale of anyone outside the oil and gas companies, offered some sobering views on this. His data shows that spectacularly high early decline rates in existing shale gas and shale oil (more correctly known as tight oil) wells means high levels of drilling are needed just to maintain production. This problem is compounded because “sweet spots” become exhausted early in field development.
As a result, shale-gas production is already dropping in several key drilling regions, and production of tight oil in the top two regions is likely to peak as early as 2016 or 2017. These two regions, in Texas and North Dakota, comprise 74% of total US tight-oil production.
Like Lewis, Hughes believes that the oil and gas industry is leading the world by the nose towards an energy crisis.
Links to the presentations:
Transatlantic Energy Security Dialogue: Agenda, Participants, Part One discussion edited transcript
The Three Witches: Decline rates, soaring capex, and falling exports. Presentation by Mark Lewis.
The “Shale Revolution”: Myths and Realities. Presentation by David Hughes.
