Shell’s Mr. Hofmeister is talking about oil and natural gas, of course, which is what you would expect from the man who runs Shell. But he is also talking about other energy resources such as coal, tar sands, oil shale, heavy oils, biomass, fuel cells, solar power, wind power, and even plain-old energy conservation. It is quite a comprehensive overview, and the theme of the presentation reflects the energy investments and technological pathways that Shell is pursuing. When asked why he is not discussing nuclear power, Mr. Hofmeister states that Shell does not have corporate expertise in that field and thus he is willing to leave that radioactive energy source for others to review. Fair enough.

It Sounds Like the Peak Oil Issue

What is that old expression about, “If it walks like a duck and looks like a duck and quacks like a duck”? Here we have the president of one of the world’s largest publicly traded oil companies, in business for well over a century, traveling back and forth across the land to hold a national energy discussion. The man from Shell states in no uncertain terms that conventional crude oil is getting harder to find and extract. He begins his talks by offering a definition of “energy security” from the perspective of Shell Oil. That is, energy security means ensuring an available, affordable supply of energy for the present, the foreseeable future, and generations to come. The implication is that Shell is on the cutting edge of a strategic vision for delivering energy supply to the nation’s and world’s consumers within a market system, and working to be part of any transition or transformation from where we are now to where we will be many decades from now.

In his speeches across the U.S., Mr. Hofmeister has clearly described how the search for oil and natural gas reserves is moving into distant, dangerous expensive places to operate. Of course, he promotes opening up remote and expensive places for drilling, such as the U.S. Outer Continental Shelf (OCS). This OCS issue is, if you do not know, part of the DNA of every true oilman, certainly including this correspondent. And Mr. Hofmeister is discussing the massive, long-term, and very costly investments that his company is making in alternative energy sources, from tar sands of Canada to oil shale in Colorado. He describes other exotic and expensive energy investments that Shell is making in coal gasification and coal-to-liquid (CTL) technology, as well as in fuel cells, solar cells, and wind power. It all sounds, to the informed listener, like Mr. Hofmeister is discussing the Peak Oil issue.

The Peak Oil Paradigm

All of what Mr. Hofmeister is saying certainly fits in to the standard Peak Oil paradigm, which is that mankind has generally located, if not discovered, most of the conventional crude oil that there is to find in the crust of the Earth, and has produced and consumed something near half of it. That is, out of a conventional, worldwide resource base of conventional oil that is estimated by some knowledgeable commentators at about 2.2 trillion barrels, about 90% has been discovered and about 1 trillion barrels have been extracted and consumed over the past 150 years or so. At the present time the global oil industry is pumping the world’s known oil reserves at a rate of about 1,000 barrels per second, or 85 million barrels per day (mbd), or about 31 billion barrels per year. And the global economy is, as frequent readers of this column know, consuming or otherwise burning up almost every drop of that oil. And not to get too preachy, but watch what happens if just a couple of hundred thousand barrels per day of production (near a rounding error from a production base of 85 mbd) go off line, such as occurred last August when BP closed the Alaska pipeline.

So do the math, dear readers. Follow the facts. Watch the trends. Mankind is at the top (or “peak”) of the conventional oil production curve. The world’s major oil provinces and largest oil fields are barely holding steady in production (Saudi’s Ghawar Field, for example), or are in irreversible decline (U.S. Lower 48 and Alaska, North Sea, Mexico’s Cantarell, Kuwait’s Burgan, China’s Daqing, Russia’s Samotlor and Romashkino, and many others). The world is pumping and burning oil that was discovered decades ago. And despite massive and costly efforts at exploration, overall, the global oil industry is pumping conventional oil reserves out of the ground at a far faster rate than it is discovering new reserves. So in the past few years, “new” oil production has barely kept up with depletion and decline in volumes produced from older areas.

“Call It a Banana”

Yes, do the math. These facts are the heart and soul of the Peak Oil discussion, dear readers. There is a lot of conventional oil in the crust of the Earth, and obviously, there is enough to support current daily global oil production of around 85 mbd, at least for a while. But only for a while. (How long? Good question.) What happens when conventional oil volumes begin to decline in an appreciable manner? This is exactly why big oil companies like Shell, and most government-owned oil companies, and many other large and small firms from around the world, are investing feverishly to develop alternative sources of hydrocarbon production, other energy sources, and advanced energy conservation concepts.

Thus, the future of conventional oil production bodes ill. The most likely forecast is that the rate of oil extraction will hold more or less steady and bounce along, at a maximum production plateau of about 85 mbd for some relatively short-term period of years, and then eventually follow a downward trending and irreversible curve of decline. Call it “Hubbert’s Peak” if you wish, after the title of the fine book by Princeton geology professor Kenneth Deffeyes. But Hubbert’s Peak is only a label. Call it something else, if you wish. You might even want to quote the late, great Groucho Marx and “Call it a “banana.”

Plenty of Uncertainty

So yes, the Peak Oil scenario rests on the assumption that the world’s largest oil provinces, in both area and volume, have been located from Texas and Mexico to Saudi Arabia and Iran, from the North Sea to West Africa, from Western Siberia to Northern China, from many spots here to many other spots there. But no, for all the purists out there, this does not mean that we know where every deposit of conventional oil is located, to a precise grid description on the face of the planet. There is plenty of uncertainty about the future of exploration and production. There are, to be sure, many dry holes yet to be drilled.

Rest assured that the world’s oil industry will be exploring for oil and drilling wells far into the future, to recover the valuable hydrocarbon product from the rock beds of the Earth. And it means that the future of conventional oil exploration will be one in which those geologists and drillers look for smaller and smaller oil fields, in more and more remote locales. There will, of course, in that oil-searching future be plenty of good jobs and good wages for geologists, geophysicists, and engineers of every ilk and stripe, and drillers and logisticians and the myriad of oil service personnel who make it all happen. And again, to his credit, Shell’s Answer Man Mr. Hofmeister has given more than a few speeches addressing the industry-wide chronic shortage of personnel with critical skills that is currently hamstringing many exploration and production efforts.

The Peak Oil Question

As I mentioned in Part I of this article, Mr. Hofmeister takes questions as well as gives speeches. And so I asked him straight up about Peak Oil: “Mr. Hofmeister, does Shell Oil have a corporate policy or position on the concept of Peak Oil, which you know was pioneered by former Shell geologist M. King Hubbert?”

And here is exactly what Mr. Hofmeister said: “Among informed Shell executives, there is a rejection of the Peak Oil theory.” Peak Oil is, he stated, “based on flawed assumptions.”

Mr. Hofmeister listed three reasons why Shell executives reject Peak Oil theory:

1. Peak Oil deals with conventional oil and does not take into account sources of unconventional oil, such as tar sand, oil shale, and heavy oil.
2. Peak Oil assumes that technology is static, when, in reality, there have been “huge strides” in the ability to enhance oil recovery from older oil fields.
3. By diversifying energy resources, “People will switch demand to other energy sources” long before conventional oil runs out.

Amplifying this last point, Mr. Hofmeister mentioned an old saying that has been, I believe, first attributed to former Saudi Oil Minister Sheikh Zaki Yamani, that “The Stone Age did not end for lack of stones, and the Oil Age will not end for lack of oil.”

And finally, Mr. Hofmeister made another comment along these lines: “We will reach Peak Oil, but not for lack of oil.”

Not for Lack of Oil?

Earlier in this article, I mentioned the old expression that “If it walks like a duck and looks like a duck and quacks like a duck…” Well, there are more ducks here than on Old McDonald’s Farm. I honestly admire and commend Shell Oil Co. and Shell’s Mr. Hofmeister for going around to discuss the energy predicament of the U.S. and the world. Mr. Hofmeister is saying many of the right things, in my view, and he is in a position to know what he is talking about. But what is going on? What is with the Peak Oil denial by Shell?

According to the president of Shell, Peak Oil is “based on flawed assumptions”? I just do not get that. Actually, the mathematical support of the Peak Oil argument is based largely upon industry-supplied data sets. That is, Peak Oil is based on historical and current production data for conventional oil, and the only place to get that kind of data is from industrial summaries such as the BP Statistical Review or Oil & Gas Journal or by summarizing collections of government-mandated data. So not to overstate the issue, but it is the camp that diminishes or denies Peak Oil that is using the flawed assumptions.

Conventional Oil

The critics focus on the point that the Peak Oil concept focuses on conventional oil, and does not take into account other hydrocarbon alternatives. Well, yes, after a fashion. Peak Oil is, and always has been, about “conventional oil” recovery. The discovery and recovery of conventional oil has been occurring for about 150 years, since 1859, when Col. Edwin Drake pounded down his famous well at Titusville. When former Shell geologist M. King Hubbert first articulated the Peak Oil concept in the 1950s, conventional oil was the whole ballgame. And the world is now at the point at which conventional oil extraction is a more or less flat, at a production rate of something over 80 million barrels per day (mbd), with the balance in natural gas liquids and other energy fluids.

And this “conventional” oil distinction of the Peak Oil argument is not some sort of “flaw” in the assumption; it is critical to understanding the point. With the exception of just a few million barrels per day of heavy oil, very sour crude, oil from tar, and a few other exotic forms of hydrocarbon, the entire world’s industrial liquid fuel infrastructure is wired and plumbed for conventional crude oil. This is the 150-year legacy of past investment at work. For example, the plastic and rubber gaskets in the engines of almost all of the world’s 500 million or so motorized vehicles are designed for use with oil-based gasoline, and rapidly corrode if ethanol is used for fuel.

Look at it from the other perspective. The world simply does not have the industrial infrastructure to produce 85 mbd of “alternative” forms of hydrocarbon fuel and there is no program in place to construct it, certainly not over the next few decades. After 20-plus more years of investment in the tar sands of Alberta, for example, the government of Canada is forecasting at most about 3 mbd of synthetic crude oil production by 2025. And this will require immense amounts of fresh water and natural gas, the supplies of which are entirely problematic.

And for all intents and purposes, there is simply no oil shale industry (let alone a world-scale oil shale industry), despite over a century of periodic hype to include the research performed by Shell in Colorado. Coal-to-liquid (CTL) efforts are embryonic, and it is a fair statement to say that no one really knows what a large-scale CTL industry will look like, what the technology will entail, what the environmental impact will be, and what the energy return on energy investment (EROEI) will be.

Technology

The critics also often argue that the Peak Oil thesis does not take into account new forms of technology that expands the reach for oil to deeper and more remote locales, or new equipment and processes that improve oil recovery from rock formations.

Actually, the improvement in technology is one of the things that demonstrate the point of Peak Oil. The “easy” oil has been found, and Shell states as much in its corporate advertising, along with Chevron, BP, and most other oil companies that pay good money to advertise their efforts. A deepwater oil well in the Gulf of Mexico, for example, costs in the neighborhood of $125 million, as was the case with Chevron’s 28,000-foot Jack-2 well that drew so much attention in September 2006. Would Chevron, or any other oil company, drill 28,000-foot wells that cost $125 million if there were cheaper alternatives? Deep, remote, expensive exploration and production wells make the case for Peak Oil, not diminish it.

As for enhanced oil recovery (EOR) methods, again these technological advancements make the case for Peak Oil. On the one hand, EOR is a market response to the rising price of conventional oil, so EOR merely illustrates that oil is becoming scarce and worth more investment to recover from the ground.

At the same time, EOR merely allows the oil producer to recover a higher percentage of the oil in place. EOR does not “make” any new oil in the rock formations. What is down there is down there, and EOR is just a way of leveraging your investment in a hole in the ground to get more oil out, and often as not to get it out more quickly. Whether your methodology is to drill horizontal wells or to perform multilateral completions or to inject water or gas to keep up the reservoir pressures or pump surfactants or other chemicals into the oil-bearing formation, what you are doing is mobilizing the oil and accelerating oil extraction from the future into the present.

The Peak Oil problem with EOR comes when the distant future shows up and becomes the present. Then, your extraction drops precipitously and your irreversible decline curve kicks in with a vengeance. Oil-producing regions such as Mexico’s Cantarell, the North Sea, or even parts of Saudi Ghawar illustrate the point. These great oil-producing regions have been the subject of EOR since the 1980s, and now their annual production decline rates are in the range of 12% and more. And compounding the problem, the decline in production leaves a major gap in the supply curve going forward, particularly since no one is “discovering” any other new oil provinces like Ghawar, Cantarell, or the North Sea.

So EOR is a technological means of pulling more oil out of the same holes, but it is not a contradiction to the argument embodied by the term “Peak Oil.”

Consumer Behavior

As for the argument that people will change demand and consumption habits long before we “run out of oil,” this is actually part and parcel of the basic Peak Oil thesis as well. Peak Oil is real, as are markets and market behaviors. Prices rise, and people react.

And of course, people will change their habits as conventional oil becomes more and more scarce, and expensive, going forward. They will have to, just as the world changed its consumption habits in 1978 and 1979 when the Iranian Revolution took almost the entire petroleum output of that nation offline within a matter of months. When the oil was not there, it was not there. Prices rose. People changed behavior. Economies crashed. And so it will be in the future. We can prepare or not, with a sense of urgency or not.

Moving the Goal Posts

So to my way of seeing things, it is the critics of the Peak Oil concept who keep attempting to redefine the terms. In one intellectual form or another, they keep trying to move the goal posts whenever some new evidence comes along that makes a new point within the discussion.

But this two-part article concerns Shell Oil Co., its president, John Hofmeister, and his traveling speaking tour. Shell and its president are attempting to hold a national energy discussion and to get people at the grass roots thinking about whence will come the nation’s energy supply in the future and the need for a true long-term national energy strategy. The Shell Answer Man is putting quite a bit of valid, accurate information about energy out on the table for all to see, from the depleting oil situation to the need for significant energy conservation efforts. Bravo.

We can disagree about this feature or that of what Mr. Hofmeister is saying, and even differ about the name on the label. Is it “Peak Oil” or no? I happen to believe that it clarifies the thinking process to call things by their correct name. But then again, it all may be of little consequence in the long term. We shall see. As our Arab friends say, “The dogs bark. The caravan moves on.”

Until we meet again…
Byron W. King

February 23, 2007

The Shell Answer Man, Part II was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Shocked, Shocked

“I was shocked,” said Mr. Hofmeister, “at how many people actually believe in the Peak Oil theory.” Was he really shocked? Or perhaps he was, as the inspector of police noted in the movie Casablanca when he learned that people were gambling in a certain saloon, merely “shocked, shocked.”

Shell’s Mr. Hofmeister cannot be unaware of Peak Oil theory. The Peak Oil theory was, after all, pioneered in the 1950s by a geologist named M. King Hubbert (1903-1989), who worked for none other than Shell. It is not quite like the guy who runs General Electric dismissing the import of Thomas Edison or the development of the light bulb, but it is in the same ballpark.

Shell’s geologist Hubbert based his Peak Oil concept on the rather obvious point that you cannot extract oil that you have not discovered from the ground. So Hubbert reviewed mountains of data concerning oil discoveries, and oil extraction and production, dating back as far as the 1860s. Hubbert noted the common trend in oil field development for a new field to come online and oil production to increase as the field was drilled and developed. But then, over time, the inevitable effects of depletion would kick in and cause the overall production of the oil field steadily to decline.

Hubbert’s Curve

In the days before sophisticated computers and elaborate spreadsheet programs, Hubbert crunched his own numbers. He cumulated the reserve figures for oil discoveries in the U.S. and the production histories of thousands of U.S. oil fields dating back almost a century. Hubbert observed and demonstrated, through a process called “reserve backdating,” that most major oil discoveries in the U.S. had occurred by the 1930s. That is, even though reserves may not have been listed on a company’s books until much later, they were, in geological fact, part of the original discovery many years before. And Hubbert focused on the point that after the largest oil fields had been discovered, in terms of both surface area and volume of calculated reserves, the “new” discoveries thereafter tended to be smaller oil deposits, or extensions of previously discovered oil fields and oil-bearing trends:

In a paper that he prepared and delivered in 1956, over the objection of several Shell executives, Hubbert postulated that total U.S. oil production would increase until about 1970 and then reach a “peak,” from which it would then steadily decline in volume over time:

Hubbert updated his 1956 predictions in the early 1960s and came up with essentially the same forecast of U.S. oil production peaking by 1970. Hubbert did not anticipate the 1968 discovery of the oil field at Prudhoe Bay, Alaska. But his numbers were prophetic, and eerily accurate, for the lower 48 states. Almost on cue in 1970, overall U.S. oil production peaked and commenced its long trend of irreversible decline, barely changed even by the development of Prudhoe Bay in the 1970s. Thereafter, the U.S. has imported more and more conventional oil to meet its daily needs:

So the discovery side of Peak Oil theory holds that mankind has identified and located, if not actually discovered, most of the conventional crude oil that there is to find in the crust of the Earth. The production side of Peak Oil theory holds that mankind has produced, and, of course, consumed, something near half of it. In terms of really big Peak Oil numbers, out of a worldwide resource base of conventional oil that is estimated by some knowledgeable commentators at about 2.2 trillion barrels, about 90% has been discovered and about 1 trillion barrels have been extracted and consumed over the past 150 years or so.

Bell-Shaped Curve

Mathematically, the history of oil production in any given region is a bell-shaped curve, with “tails” on each side and a relatively rounded top in between. In a very general sense, the initial increase of the first half of the curve is mirrored by the decline phase on the other side. It is like saying that “what goes up must come down,” but it is all rooted in the concept that you cannot produce what you have not discovered.

Applying Hubbert’s methodology to the global resource base, the world’s oil industry currently appears to be at the top of the Hubbert curve. Each day, the world’s oil industry is pumping the known oil reserves out of the crust of the Earth at a rate of about 1,000 barrels per second, or 85 million barrels per day, or about 31 billion barrels per year. And the global economy is consuming or otherwise burning up almost every drop of that oil. (Some very small fraction goes into storage, such as for the Strategic Petroleum Reserve of the U.S. or comparable reserves in other nations such as China. This oil, too, will eventually be burned or otherwise consumed.)

The balance between global supply and demand is precarious, such that if just a couple of hundred thousand barrels per day of production (near a rounding error from a production base of 85 mbd) go offline, there can be significant price moves, as occurred last August when BP closed the Alaska pipeline. Or consider what the traders call “political risk,” such as the result of hostilities closing a maritime control point such as the Straits of Hormuz. If even one oil tanker were to, say, hit a mine in the Persian Gulf, oil prices would skyrocket within hours.

The Edge of Secure Supply

Shell’s Mr. Hofmeister knows all of this. At a recent speech he gave in Pittsburgh, for example, he began his talk with a rather gripping story that dealt with the supply of refined product, as opposed to crude oil. But the story illustrates the point.

According to Mr. Hofmeister, in the aftermath of hurricanes Katrina and Rita in 2005, almost all of the U.S. Gulf Coast refineries were down due to flooding and other storm damage. Shell had 300,000 barrels of refined product in storage at its Baytown, Texas, refinery, which was essentially the only supply available to the entire U.S. Southeast region, but there was no electricity with which to run the pumps. Whoops!

Shell employees and contractors were working feverishly to rig up electric generators at the Texas facility, but it was a race against time, over a 48-hour period, until the Plantation and Colonial pipelines — – the major trunk carriers for refined product between Texas and the Southeastern U.S. — went dry. If word escaped of the predicament, Shell executives believed that many members of the consuming public would have panicked. Then panic-buying would have immediately kicked in and rapidly drained whatever fuel was left in the supply system. The entire Southeast, home to about 60 million souls, could have been caught in a situation in which there was be no fuel available anywhere. It fell to Shell’s Mr. Hofmeister to call the U.S. secretary of energy and deliver the bad news.

But like the cavalry arriving near the end of a John Ford Western, Shell’s hardworking people hooked up the Texas facility with electric power, with all of about 12 hours to spare. Shell started pumping gas into the pipeline system. There were, you may recall, spot shortages of fuel in the Southeast, but no regional lack of product. Still, as Mr. Hofmeister put it, it was a close call and the U.S. was and remains “on the edge of secure supply.”

Same Thing With Crude Oil

Mr. Hofmeister’s story concerned gasoline, but he could have told the same story with respect to crude oil or natural gas. The Gulf of Mexico hurricanes of 2005 wrecked oil and gas production facilities all along the littoral, to the point of toppling over offshore structures that are the size of World War II aircraft carriers. The hurricanes churned the water column down to the seafloor, and ripped up or displaced underwater pipelines, subsea production equipment, and much else of the Gulf Coast oil infrastructure on which the U.S. relies for energy supply. In addition to the damage to property, tens of thousands of members of the oil industry work force were displaced from their homes and job sites by hurricane damage. The Gulf Coast oil industry still has not recovered, 18 months later.

So yes, “we are on the edge of secure supply” from prospect, to drill bit, to pipeline and refinery, to the gas pump. And a lot of people are starting to figure that out and think about it.

Peak Oil theory is one way of making sense of quite a bit of what goes on in this world, beginning with the supply of conventional crude oil and with implications for the rest of the energy mix of the world’s advanced industrial societies. There is a certain geological coherence (even elegance) to the idea of Peak Oil, and a mathematically demonstrable basis to the concept.

So it should not “shock” anyone, let alone the president of Shell Oil Co., that “many people actually believe in the Peak Oil theory.” In fact, I think that Peak Oil theory makes Mr. Hofmeister’s job easier. Once people understand the key issue behind the nation’s energy supply, it is more probable that they will be willing and able to design a solution.

Until we meet again…
Byron W. King

February 16, 2007

Peak Oil Shock was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.