söndag 9 maj 2010

Conventional oil

Conventional oil is oil that does not include e.g. deep sea off shore drilling and so called tar sands in Canada and Venezuela. In short conventional oil is the oil relatively easy and inexpensive to get access to.

Deep sea off shore oil and tar sands however entirely are very different animals. That is as the costs associated with drilling thousands of meter below the surface implies great costs as well as risk and certainly tar sands demand much more work than conventional oil in order to be able to get the oil out of the ground. Thus an oil price of $70 and higher is required in order to get enough incentive to get that oil out from the ground.

Therefore it’s now interesting to review what now the situation in regards of conventional oil is. In total we have some 70.000 oil fields in the world today producing conventional oil.

Out of these 70.000 fields
• 507 oil fields produce 60% of all oil produced in the world
• 110 oil fields produce some 50% of all oil
• 20 oil fields produce some 27% of all oil
• And 10 oil fields produce some 20% of all oil

Interesting to note is that a vast majority of these oil fields have been discovered before 1958 and in fact in 1974 we had a peak of new conventional oil filed discovered. In fact since then we have seen fewer and fewer new conventional oil finds per year. In November 2008 the IEA presented a report after having reviewed 800 of the largest conventional oil field’s production that the average natural decline rate for these fields now had reached a stunning 9% annual decline. That natural decline rate is then expected to increase somewhat going forward. IEA also concluded that with enough quite massive technology investments made in order to manage these declines in existing fields the natural decline rate could be reduced to some 6.7% annually but not less.

"We estimate that the average production-weighted observed decline rate worldwide is currently 6.7% for fields that have passed their production peak. In our Reference Scenario, this rate increases to 8.6% in 2030. For the world as a whole, it is estimated at 9% for post-peak fields. In other words the decline in production from existing fields would have been around one-third faster had there been no capital spending on those fields once they had passed their peak. Our Reference Scenario projections imply an increase in the global average natural decline to around 10.5% per year by 2030 (almost two percentage points higher than the observed rate), as all regions experience a drop in average field size and most see a shift in production to offshore fields over the projection period. This means that total upstream investment in some countries will need to rise, in some cases significantly, just to offset this faster decline. Our Reference Scenario projections imply an increase in the global average natural decline(almost two percentage points higher than the observed rate), as all regions experience a drop in average field size and most see a shift in production to offshore fields over the projection period.

"Executive Summary"

The issue here has been that not enough investments have been made given the turmoil in the financial markets last couple of years.

So in order just to compensate for the decline in the existing oil fields an equivalent of a new Saudi Arabia must from now on be not only discovered but brought on line every 2- 3 years going forward, and that’s then just in order to be able to stay at flat world oil production.

Add then to this fact also the need for primarily emerging markets to increase their appetite for oil and its evident this all spells a significantly higher future oil price.

Sure the costs for getting the oil out of deep sea off shore well are significantly higher but also the risks. That is now a risk that has become quite evident with BPs Deepwater Horizon demise in the Gulf of Mexico where now the daily oil spill out of that fields cold be even as high as 50.000 barrels a day. So are we prepared to pay not only the costs for getting that oil out of the ground but are we in addition to that cost also prepared to pay the risk premium that no doubt will be the result of this accident?

The Canadian tar sands sure represents a huge reserves oil opportunity. Cleary the costs associated with getting this tar oil out of the ground are high and sure there are environmental implications as well significant. But what many neglect to realize is that the oil flow rates from this resource will be quite small as the work associated with getting not only the oil out of the ground but in addition to this also refine and process this thick oil before it can be used is quite extensive. Thus some argue the costs for getting more than 3 million barrels per day out of the ground from this recourse will be quite staggering.

Then as a final note – for how long can we, the oil consuming countries count on the oil producing countries to give us some of their valuable and ever diminishing resource oil? At what point will the oil producing countries start to manage their resource in order to prioritize their own domestic markets, infrastructure development and industry?

Expect therefore that long before we’ll see the effects of reduces oil production we’ll see it as a sharp decline of oil exports from the producing countries as they increasingly start to manage their oil as a strategic valuable asset.

So whilst all eye’s right now are watching the financial markets turmoil primarily in Greece there may be an even more significant problem lurking in the shadows absolutely nobody right now is paying attention to.

Conclusion: rather than keep printing new money and hand it over to the banks let these large monoliths go bust, let the smaller already profitable banks survive and instead use the money to invest in a complete rebuild of a new sustainable energy infrastructure world wide, we'll sure need it sooner than you might think.

IEA - A Watchdog Alarmed But Clearly Afraid Of It's Own Bark

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