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06/13/2008

All About Oil

Some recent thoughts on oil and our energy predicament,
specifically the idea of peak oil and how America is a hypocrite.

Carola Hoyos / Financial Times

“Most of the world’s oil executives, government ministers,
analysts and consultants reject the ‘peak oil’ theory – the notion
based on the 1950s work of Marion King Hubbert, a Shell
geologist, that crude production will soon enter terminal decline.
They say it understates remaining reserves, plays down the
contribution of technological advances and ignores the role of
market forces in shaping future supply.

“But with the oil price at ($130+) a barrel, more than 1,000
percent higher than a decade ago, fears of the end of the
hydrocarbon age have seeped into the mainstream .

“So are the peak oilists right? A series of recent events certainly
appears to lend credence to those who argue that the world’s
ageing oilfields are being sucked dry amid China’s and India’s
determination to lift themselves out of poverty and the west’s
reluctance to give up the luxuries of modern oil-dependent life.

“The fact that Russia’s oil production declined almost half a
percentage point in April, the first drop in a decade, was
shocking enough news from the world’s second biggest oil
producer, whose output was growing at a rate of 12 percent just
five years ago. But Russian oil executives have gone a step
further. Leonid Fedun, vice president of Lukoil, told the
Financial Times the country’s production may have already
reached its peak.

“Just days later Saudi Arabia, the world’s biggest oil producer
and by far the largest exporter, confirmed it had put on hold
plans to increase the kingdom’s production capacity .when the
kingdom produces more oil, it eats into its cushion of spare
supply .

“One problem is that nobody really knows what is going on
inside Saudi Arabia’s oil industry. Riyadh is so guarded that
analysts from Sanford Bernstein, took to spying on its activity
via satellite. They spent nine months monitoring the country’s
drilling activities and measuring whether Ghawar, the world’s
biggest oilfield, had subsided. Their conclusion: Saudi Arabia is
having to work harder than the country’s engineers and
geologists expected in 2004 to squeeze more out of the northern
part of the ageing Ghawar field.

“Matthew Simmons, an energy investment banker, has a bleaker
view of Ghawar’s health. He took the news that Saudi Arabia
was not planning to expand to 15mmbd as further evidence that
the kingdom was struggling to ward off a collapse of its
oilfields.”

Simmons published his now famous book “Twilight in the
Desert: The Coming Saudi Oil Shock and the World Economy”
in 2005, and aside from Saudi Arabia’s production issues, found
that “the world depends on just a few giant, old, declining
oilfields and that almost nothing to match them has been
discovered since the 1970s. One in every five barrels of oil
consumed each day is pumped from a field that is more than 40
years old. Not a single field discovered in the past 30 years has
ever been able to produce more than 1mmbd and the number and
size of the fields discovered since then have been shrinking
dramatically.”

Take Mexico’s Cantarell field. Discovered in 1976, at its peak
Cantarell produced 2mmbd. Today it’s half that.

---

Paul Roberts / National Geographic (June 2008)

“(Even) oil optimists concede that physical limits are beginning
to loom. Consider the issue of discovery rates. Oil can’t be
pumped from the ground until it has been found, and yet the
volume discovered each year has steadily fallen since the early
1960s – despite dazzling technological advances, including
computer-assisted seismic imaging that allows companies to
‘see’ oil deep below the Earth’s surface. One reason for the
decline is simple mathematics: Most of the big, easily located
fields – the so-called ‘elephants’ – were discovered decades ago,
and the remaining fields tend to be small. Not only are they
harder to find than big fields, but they must also be found in
greater numbers to produce as much oil. Last November, for
example, oil executives were ecstatic over the discovery off the
Brazilian coast of a field called Tupi, thought to be the biggest
find in seven years. And yet with as much as eight billion
barrels, Tupi is about a fifteenth the size of Saudi Arabia’s
legendary Ghawar, which held about 120 billion barrels at its
discovery in 1948.

“Smaller fields also cost more to operate than larger ones do.
‘The world has zillions of little fields,’ says Matt Simmons. ‘But
the problem is, you need a zillion oil rigs to get at them all.’ This
cost disparity is one reason the industry prefers to rely on large
fields – and why they supply more than a third of our daily
output. Unfortunately, because most of the biggest finds were
made decades ago, much of our oil is coming from mature fields
that are now approaching their peaks, or are even in decline;
output is plummeting in once prolific regions such as the North
Sea and Alaska’s North Slope.

“Worldwide, output from existing fields is falling by as much as
8 percent a year, which means that oil companies must develop
up to seven million barrels a day in additional capacity simply to
keep current output steady – plus many more millions of barrels
to meet the growth in demand of about 1.5 percent a year. And
yet, with declining field sizes, rising costs, and political barriers,
finding those new barrels is getting harder and harder .

“By 2010, according to James Mulva, CEO of ConocoPhillips,
nearly 40 percent of the world’s daily oil output will have to
come from fields that have not been tapped – or even discovered.
By 2030 nearly all our oil will come from fields not currently in
operation. Mulva, for one, isn’t sure enough new oil can be
pumped. At a conference in New York last fall, he predicted
output would stall at 100 million barrels a day – the same figure
Total’s chief had projected. ‘And the reason,’ Mulva said, ‘is,
where is all that going to come from?’

“Whatever the ceiling turns out to be, one prediction seems
secure: The era of cheap oil is behind us. If the past is any guide,
the world may be in for a rough ride. In the early 1970s, during
the Arab oil embargo, U.S. policymakers considered desperate
measures to keep oil supplies flowing, even drawing up
contingency plans to seize Middle Eastern oil fields.

“Washington backed away from military action then, but such
tensions are likely to reemerge. Since Saudi Arabia and other
members of OPEC control 75 percent of the world’s total oil
reserves, their output will peak substantially later than that of
other oil regions, giving them even more power over prices and
the world economy. A peak or plateau in oil production will
also mean that, with rising population, the amount of gasoline,
kerosene, and diesel available for each person on the planet may
be significantly less than it is today. And if that’s bad news, for
energy-intensive economies, such as the United States, it could
be disastrous for the developing world, which relies on
petroleum fuels not just for transport but also for cooking,
lighting, and irrigation.”

---

George Will / Washington Post

“Rising in the Senate on May 13, Chuck Schumer, the New York
Democrat, explained: ‘I rise to discuss rising energy prices.’ The
president was heading to Saudi Arabia to seek an increase in its
oil production and Schumer’s gorge was rising.

“Saudi Arabia, he said, ‘holds the key to reducing gasoline prices
at home in the short term.’ Therefore arms sales to that kingdom
should be blocked unless it ‘increases its oil production by one
million barrels per day,’ which would cause the price of gasoline
to fall ’50 cents a gallon almost immediately.’

“Can a senator, with so many things on his mind, know so
precisely how the price of gasoline would respond to that
increase in the oil supply?

“Schumer does know that if you increase the supply of
something, the price of it probably will fall. That’s why he and
96 other senators recently voted to increase the supply of oil on
the market by stopping the flow of oil into the Strategic
Petroleum Reserve, which protects against major physical
interruptions.

“Seventy-one of the 97 senators who voted to stop filling the
SPR also oppose drilling in the Arctic National Wildlife Refuge.

“One million barrels is what might today be flowing from
ANWR if in 1995 President Bill Clinton hadn’t vetoed
legislation to permit drilling there. One million barrels produce
27 million gallons of gasoline and diesel fuel. Seventy-two of
today’s senators – including Schumer, of course, and 38 other
Democrats, including Barack Obama, and 33 Republicans,
including John McCain – have voted to keep ANWR’s estimated
10.4 billion barrels of oil off the market.

“So Schumer, according to Schumer, is complicit in taking $10
away from every American who buys 20 gallons of gasoline .

“Also disqualified from complaining are all voters who sent to
Washington senators and representatives who’ve voted to keep
ANWR’s oil in the ground, and who voted to put 85 percent of
America’s offshore territory off-limits to drilling .

“Drilling is underway 60 miles off Florida. The drilling is being
done by China, in cooperation with Cuba, which is drilling closer
to South Florida than U.S. companies are.

“ANWR is larger than the combined areas of five states
(Massachusetts, Connecticut, Rhode Island, New Jersey,
Delaware) and drilling along its coastal plane would be confined
to a space one-sixth the size of Washington’s Dulles Airport.

“Offshore? Hurricanes Katrina and Rita destroyed or damaged
hundreds of drilling rigs without causing a large spill. There
hasn’t been a significant spill from an offshore U.S. well since
1969 .

“America says to foreign producers: We prefer not to pump our
oil, so please pump more of yours, thereby lowering its value, for
our benefit. Let it not be said that America has no energy
policy.”

Wall Street History returns next week.

Brian Trumbore



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-06/13/2008-      
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Wall Street History

06/13/2008

All About Oil

Some recent thoughts on oil and our energy predicament,
specifically the idea of peak oil and how America is a hypocrite.

Carola Hoyos / Financial Times

“Most of the world’s oil executives, government ministers,
analysts and consultants reject the ‘peak oil’ theory – the notion
based on the 1950s work of Marion King Hubbert, a Shell
geologist, that crude production will soon enter terminal decline.
They say it understates remaining reserves, plays down the
contribution of technological advances and ignores the role of
market forces in shaping future supply.

“But with the oil price at ($130+) a barrel, more than 1,000
percent higher than a decade ago, fears of the end of the
hydrocarbon age have seeped into the mainstream .

“So are the peak oilists right? A series of recent events certainly
appears to lend credence to those who argue that the world’s
ageing oilfields are being sucked dry amid China’s and India’s
determination to lift themselves out of poverty and the west’s
reluctance to give up the luxuries of modern oil-dependent life.

“The fact that Russia’s oil production declined almost half a
percentage point in April, the first drop in a decade, was
shocking enough news from the world’s second biggest oil
producer, whose output was growing at a rate of 12 percent just
five years ago. But Russian oil executives have gone a step
further. Leonid Fedun, vice president of Lukoil, told the
Financial Times the country’s production may have already
reached its peak.

“Just days later Saudi Arabia, the world’s biggest oil producer
and by far the largest exporter, confirmed it had put on hold
plans to increase the kingdom’s production capacity .when the
kingdom produces more oil, it eats into its cushion of spare
supply .

“One problem is that nobody really knows what is going on
inside Saudi Arabia’s oil industry. Riyadh is so guarded that
analysts from Sanford Bernstein, took to spying on its activity
via satellite. They spent nine months monitoring the country’s
drilling activities and measuring whether Ghawar, the world’s
biggest oilfield, had subsided. Their conclusion: Saudi Arabia is
having to work harder than the country’s engineers and
geologists expected in 2004 to squeeze more out of the northern
part of the ageing Ghawar field.

“Matthew Simmons, an energy investment banker, has a bleaker
view of Ghawar’s health. He took the news that Saudi Arabia
was not planning to expand to 15mmbd as further evidence that
the kingdom was struggling to ward off a collapse of its
oilfields.”

Simmons published his now famous book “Twilight in the
Desert: The Coming Saudi Oil Shock and the World Economy”
in 2005, and aside from Saudi Arabia’s production issues, found
that “the world depends on just a few giant, old, declining
oilfields and that almost nothing to match them has been
discovered since the 1970s. One in every five barrels of oil
consumed each day is pumped from a field that is more than 40
years old. Not a single field discovered in the past 30 years has
ever been able to produce more than 1mmbd and the number and
size of the fields discovered since then have been shrinking
dramatically.”

Take Mexico’s Cantarell field. Discovered in 1976, at its peak
Cantarell produced 2mmbd. Today it’s half that.

---

Paul Roberts / National Geographic (June 2008)

“(Even) oil optimists concede that physical limits are beginning
to loom. Consider the issue of discovery rates. Oil can’t be
pumped from the ground until it has been found, and yet the
volume discovered each year has steadily fallen since the early
1960s – despite dazzling technological advances, including
computer-assisted seismic imaging that allows companies to
‘see’ oil deep below the Earth’s surface. One reason for the
decline is simple mathematics: Most of the big, easily located
fields – the so-called ‘elephants’ – were discovered decades ago,
and the remaining fields tend to be small. Not only are they
harder to find than big fields, but they must also be found in
greater numbers to produce as much oil. Last November, for
example, oil executives were ecstatic over the discovery off the
Brazilian coast of a field called Tupi, thought to be the biggest
find in seven years. And yet with as much as eight billion
barrels, Tupi is about a fifteenth the size of Saudi Arabia’s
legendary Ghawar, which held about 120 billion barrels at its
discovery in 1948.

“Smaller fields also cost more to operate than larger ones do.
‘The world has zillions of little fields,’ says Matt Simmons. ‘But
the problem is, you need a zillion oil rigs to get at them all.’ This
cost disparity is one reason the industry prefers to rely on large
fields – and why they supply more than a third of our daily
output. Unfortunately, because most of the biggest finds were
made decades ago, much of our oil is coming from mature fields
that are now approaching their peaks, or are even in decline;
output is plummeting in once prolific regions such as the North
Sea and Alaska’s North Slope.

“Worldwide, output from existing fields is falling by as much as
8 percent a year, which means that oil companies must develop
up to seven million barrels a day in additional capacity simply to
keep current output steady – plus many more millions of barrels
to meet the growth in demand of about 1.5 percent a year. And
yet, with declining field sizes, rising costs, and political barriers,
finding those new barrels is getting harder and harder .

“By 2010, according to James Mulva, CEO of ConocoPhillips,
nearly 40 percent of the world’s daily oil output will have to
come from fields that have not been tapped – or even discovered.
By 2030 nearly all our oil will come from fields not currently in
operation. Mulva, for one, isn’t sure enough new oil can be
pumped. At a conference in New York last fall, he predicted
output would stall at 100 million barrels a day – the same figure
Total’s chief had projected. ‘And the reason,’ Mulva said, ‘is,
where is all that going to come from?’

“Whatever the ceiling turns out to be, one prediction seems
secure: The era of cheap oil is behind us. If the past is any guide,
the world may be in for a rough ride. In the early 1970s, during
the Arab oil embargo, U.S. policymakers considered desperate
measures to keep oil supplies flowing, even drawing up
contingency plans to seize Middle Eastern oil fields.

“Washington backed away from military action then, but such
tensions are likely to reemerge. Since Saudi Arabia and other
members of OPEC control 75 percent of the world’s total oil
reserves, their output will peak substantially later than that of
other oil regions, giving them even more power over prices and
the world economy. A peak or plateau in oil production will
also mean that, with rising population, the amount of gasoline,
kerosene, and diesel available for each person on the planet may
be significantly less than it is today. And if that’s bad news, for
energy-intensive economies, such as the United States, it could
be disastrous for the developing world, which relies on
petroleum fuels not just for transport but also for cooking,
lighting, and irrigation.”

---

George Will / Washington Post

“Rising in the Senate on May 13, Chuck Schumer, the New York
Democrat, explained: ‘I rise to discuss rising energy prices.’ The
president was heading to Saudi Arabia to seek an increase in its
oil production and Schumer’s gorge was rising.

“Saudi Arabia, he said, ‘holds the key to reducing gasoline prices
at home in the short term.’ Therefore arms sales to that kingdom
should be blocked unless it ‘increases its oil production by one
million barrels per day,’ which would cause the price of gasoline
to fall ’50 cents a gallon almost immediately.’

“Can a senator, with so many things on his mind, know so
precisely how the price of gasoline would respond to that
increase in the oil supply?

“Schumer does know that if you increase the supply of
something, the price of it probably will fall. That’s why he and
96 other senators recently voted to increase the supply of oil on
the market by stopping the flow of oil into the Strategic
Petroleum Reserve, which protects against major physical
interruptions.

“Seventy-one of the 97 senators who voted to stop filling the
SPR also oppose drilling in the Arctic National Wildlife Refuge.

“One million barrels is what might today be flowing from
ANWR if in 1995 President Bill Clinton hadn’t vetoed
legislation to permit drilling there. One million barrels produce
27 million gallons of gasoline and diesel fuel. Seventy-two of
today’s senators – including Schumer, of course, and 38 other
Democrats, including Barack Obama, and 33 Republicans,
including John McCain – have voted to keep ANWR’s estimated
10.4 billion barrels of oil off the market.

“So Schumer, according to Schumer, is complicit in taking $10
away from every American who buys 20 gallons of gasoline .

“Also disqualified from complaining are all voters who sent to
Washington senators and representatives who’ve voted to keep
ANWR’s oil in the ground, and who voted to put 85 percent of
America’s offshore territory off-limits to drilling .

“Drilling is underway 60 miles off Florida. The drilling is being
done by China, in cooperation with Cuba, which is drilling closer
to South Florida than U.S. companies are.

“ANWR is larger than the combined areas of five states
(Massachusetts, Connecticut, Rhode Island, New Jersey,
Delaware) and drilling along its coastal plane would be confined
to a space one-sixth the size of Washington’s Dulles Airport.

“Offshore? Hurricanes Katrina and Rita destroyed or damaged
hundreds of drilling rigs without causing a large spill. There
hasn’t been a significant spill from an offshore U.S. well since
1969 .

“America says to foreign producers: We prefer not to pump our
oil, so please pump more of yours, thereby lowering its value, for
our benefit. Let it not be said that America has no energy
policy.”

Wall Street History returns next week.

Brian Trumbore