Information about http://hubbert.mines.edu/news/Campbell_01-2.pdf

HUBBERT CENTER NEWSLETTER # 2001/2-1 …

Tags: abundant supply, cheap oil, colorado school of mines, economic prosperity, geochemistry, golden co, host governments, j campbell, king hubbert center, m king, north sea, oil shock, peak oil, petroleum engineering department, petroleum supply studies, school of mines, seismic surveys, technological prowess, traditional sources, vast resources,
Pages: 8
Language: english
Created: Thu Apr 26 13:12:32 2001

Display cached document

Page 1

Page 2

Page 3

Page 4

Page 5

Page 6

Page 7

Page 8

HUBBERT CENTER NEWSLETTER # 2001/2-1

M. KING HUBBERT CENTER
FOR PETROLEUM SUPPLY STUDIES
M. KING HUBBERT CENTER
Petroleum Engineering Department
COLORADO SCHOOL OF MINES
GOLDEN CO 80401-1887

PEAK OIL: A TURNING FOR MANKIND

Colin J. Campbell

The fundamental driver of the 20th Century' economic prosperity has been an abundant supply of
s
cheap oil. At first, it came largely from the United States as it opened up its extensive territories with
dynamic capitalism and technological prowess. But U.S. discovery peaked around 1930, which inevitably
led to a corresponding peak in production some forty years later. The focus of supply then shifted to the
Middle East, as its vast resources were tapped by the international companies. They however soon lost
their control in a series of expropriations as the host governments sought a greater share of the proceeds. In
1973, some Middle East governments used their control of oil as a weapon in their conflict with Israel' s
occupation of Palestine, giving rise to the First Oil Shock that rocked the world.

The international companies, anticipating these pressures, had successfully diversified their supply
before the shock, bringing in new productive provinces in Alaska, the North Sea, Africa and elsewhere.
These deposits were more difficult and costly to exploit, but production was rapidly stepped up when
control of the traditional sources was lost. In part that was made possible by great technological advances
in everything from seismic surveys to drilling. Geochemistry and better geological understanding made it
possible to identify the productive trends, once the essential data had been gathered. The new knowledge
showed both where oil was and where it was not, reducing the scope for good surprises.

The industry found and produced the expensive and difficult oil from the new provinces at the
maximum rate possible, leaving the control of the abundant, cheap and easy oil in the hands of the Middle
East OPEC countries. The latter were accordingly forced into a swing role, making up the difference
between world demand and what the other countries could produce. It was contrary to normal economic
practice and concealed the gradual impact of depletion, growing shortage and rising cost, which would
otherwise have alerted us to what was happening.

But these new provinces faced the same depletion pattern that had already been demonstrated in
the United States. The larger fields, which are found and exploited first, gave a natural discovery peak.
Advances in technology and operating efficiency also reduced the time-lag from discovery to the
corresponding production peaks. Whereas it took the United States forty years, the North Sea, which is
now at peak, did it in just twenty-seven.

HC#2001/2-1-1
APRIL, 2001

All Hubbert Center Newsletter views are those of the individual authors and
are not necessarily those of CSM or its Petroleum Engineering Department
As discovery in the accessible areas dwindled to about one-quarter of consumption, the industry,
which fully appreciated this obvious link between discovery and production, turned its attention to the last
remaining frontier, namely the ocean depths. It is axiomatic that no one would look for oil in 6000 feet of
water if there were anywhere else easier left. The deepwater domain is also subject to depletion with an
even shorter time-lag between the peaks of discovery and production. Although much of the ocean is deep,
only a few areas have the essential geology, giving a potential of not more than about 85 Gb (billion
barrels) - enough to supply the world for less than four years. It is no panacea.

A combination of circumstances led to a dramatic fall in the price of oil in 1998. They included
unseasonably warm weather; an Asian recession that reduced the demand for swing Middle East
production; the collapse of the rouble, encouraging exports; over-estimation of supply by the International
Energy Agency (IEA), which misled OPEC; and further turns in Iraq. Furthermore, there were motives to
talk down the long-term price of oil as oil companies and their financial advisers planned acquisitions.

Major companies, plainly seeing that exploration could no longer underpin their future, took the
opportunity of the price crisis to merge, successfully concealing their real predicament from the
stockmarket. Budgets were slashed and staffs purged in a climate of uncertainty leading to an improvident
draw on stocks.

The OPEC countries themselves did everything possible to foster the notion that they could flood
the world with cheap oil at the flick of a switch. It was a strategy aimed to inhibit investments in gas, non-
conventional oil, renewable energy or energy saving that they feared might undermine the market for their
oil, on which they utterly depend.

But it was a short-lived price collapse. Before long, the underlying resource and depletion
pressures manifested themselves again with prices rebounding in a staggering 300% increase in twelve
months, when another anomalous fall occurred at the end of 2000. It was partly triggered by profit taking
for year-end financial reporting and partly by the hope of a brief reprieve as spring demand traditionally
falls.

The underlying trend is due to reassert itself, leading to the resumption of soaring oil prices. The
Middle East is working flat out to try to offset the decline of its old fields. In large measure, new
production in Venezuela can come only from infill drilling in old heavy oil fields, which is dependent on
the amount of effort and investment. It does not sound as if it has many shut-in wells either. Its oilmen
speak of reduced capacity.

The market may hope that some important recent discoveries tell a different story with a happier
ending. The long-known Azadegan prospect on the Iraq-Iran border was at last tested, delivering some 5 Gb
of reserves to Iran. Kashagan East in the north Caspian found about 7 Gb of high sulfur oil at great depth,
demonstrating that the prospect was not one huge structure as hoped, but several independent reefs. The
disappointment caused two major companies to withdraw from the venture, which is not a good omen.
Promising deepwater finds continue to be made off West Africa, but it is becoming clear from the experience
of the Gulf of Mexico that deep-water operations test technology and management to the absolute limit. Small
accidents or setbacks can have devastating consequences in this extreme environment. Petroconsultants
recently announced the total oil discovery for 2000 at 11.2 Gb, less than half consumption, and of that much
was in the Former Soviet Union and in deepwater off West Africa.
HC#2001/2-1-2

2
The reality is that there is no real reprieve. Gradually the market � and not just the oil market - will
come to realize that OPEC can no longer single-handedly manage depletion. It will be a dreadful
realization because it means that there is no ceiling to oil price other than from falling demand. That in turn
spells economic recession and a crumbling stock market, the first signs of which are already being felt.

The United States is perhaps the most vulnerable to the coming crisis having farther to fall after
the boom years, which themselves were largely driven by foreign debt and inward investment. The
growing shortfall in oil supply since its own peak of production was made good by soaring oil imports,
now contributing more than half its needs, and a move to gas. The rate of import cannot, however, be
maintained as other countries pass their own production peaks, putting ever more pressure on the Middle
East. The North Sea is now at peak, with the UK being off 7% in 2000 and 16% off October to October,
meaning that production is set to fall by one-half in ten years. For every barrel imported into the United
States, there will be one less left for anyone else, a situation inevitably leading to international tensions.

The move to gas proved to be only a short-lived palliative. Gas depletes differently from oil. An
uncontrolled gas well would blow it all away in one big puff. Production is, accordingly, capped by
infrastructure and market, leaving a large, unseen balloon of readily available spare capacity. In a
privatized market, trading on a daily basis, production becomes cheaper and cheaper as the original costs
are written off and as this almost free spare capacity is drawn down. There were no market signals of the
approach of the cliff at the end of the plateau. It accordingly came without warning, causing prices to surge
through the roof, and bringing power blackouts to California. Canada is trying to make good the shortfall,
but its stocks are falling fast too.

The US has to somehow find a way to cut its demand by at least five percent a year. It won' bet
easy, but as the octogenarian said of old age "the alternative is even worse". Europe faces the same
predicament as North Sea production plummets. Although it may draw on gas from Russia, North Africa
and the Middle East to see it over the transition, assuming that new pipelines can be built in time, that
creates a new and unwelcome geopolitical dependency.

All of this is so incredibly obvious, being clearly revealed by even the simplest analysis of
discovery and production trends. The inexplicable part is our great reluctance to look reality in the face and
at least make some plans for what promises to be one of the greatest economic and political discontinuities
of all time. Time is of the essence. It is later than you think.

HC#2001/2-1-3
References

3
Bartlett A.A., 1998, Reflections on sustainability, population growth and the environment - revisited;
Renewable Resources Journal, Winter 1997/8

BBC, 2000,The last oil shock: The Money Programme Nov.8, 2000

Bentley R.W et al.,2000, Perspectives on the future of oil, Energy Exploration & Exploitation 18/2-3

Campbell C.J., 1997, The Coming Oil Crisis; Multi-Science Publishing Co. & Petroconsultants 210p

Campbell C.J., and J.H. Laherr�re, 1998, The end of cheap oil; Scientific American March 80-86

Fleming D., 1999, The next oil shock? Prospect April

International Energy Agency ,1998, World Energy Outlook 1998 Edition

Tippee B, 1999, Presentation; CGES & Oil and Gas Journal Joint Conference, September 9, 1999.

Youngquist W., 1997, Geodestinies: the inevitable control of earth resources over nations and
individuals; Nat. Book Co., Portland 500p.

The Author: Colin J. Campbell

After finishing a Ph.D. in geology at Oxford University, C. J. Campbell joined Texaco in 1958 as an
exploration geologist in South America, later moving to BP with assignments in Colombia, Australia, and
Papua. In 1968, he joined Amoco in New York as regional geologist for Latin America, becoming Chief
Geologist in Ecuador in 1969. With the opening of the North Sea, he returned to England in 1972 as
General Manager of the Texas independent Shenandoah Oil Corporation, before rejoining Amoco to
become Exploration Manager in Norway in 1980. In 1985, he was appointed Executive Vice-President of
Fina in Norway. He is now a petroleum consultant and has had commissions from the Norwegian
Petroleum Directorate; Bulgarian government; European Commission; Amoco; Shell; Esso; Amerada;
Mobil; and others. He specializes in oil resource assessment, having published and spoken widely. His
book "The Golden Century of Oil" was published by Kluwer in 1991, and "The Coming Oil Crisis" by
Multi-Science Publishing Co. in August 1997. He has co-authored several major studies on world reserves
of oil and gas and their depletion for Petroconsultants as based on their authoritative data.

Dr. Colin J. Campbell
Petroleum Consultant
Staball Hill,
Ballydehob,
County Cork, IRELAND
Tel: (353)283 7533
Email: colincampbell@eircom.net

HC#2001/2-1-4

4
HUBBERT CENTER NEWSLETTER # 2001/2-2
OILFIELDS � MAINTENANCE EXPENSES
Colin J. Campbell and J. J. Zagar

Laymen commonly overlook the amount of work and cost involved simply in maintaining
production. Once the capital investments have been made with the wells drilled, platforms installed,
facilities commissioned and pipelines placed in service, much more remains to be done than count the
barrels of production and the commensurate revenue checks. Operating expenses, while generally lower
per barrel than investments, are key to maintaining production. No operator with a negative cash flow can
stay in business for long.

The nature of operating costs varies with the stage of the field' maturity. Let us consider, for
s
example, the challenges faced in producing the World' largest oil field, Ghawar, in Saudi Arabia.
s
Initially, the wells flowed naturally under high reservoir pressure. The produced crude was stabilized by
the removal of associated gas, to be loaded directly aboard tankers for shipment. It was a simple, cheap
operation. But later, declining reservoir pressure called for the drilling of water injection wells as well as
the installation of seawater injection pumping units and pipelines to the Gulf. Water breakthrough meant
that producing wells had to be shut-in, and structurally higher replacement wells drilled. When water
production could no longer be avoided, huge, costly facilities to separate the oil, gas and water had to be
installed, and previously shut-in wells were re-opened to maintain field production. During this period,
production wells were produced via annular flow; that is, the oil flowed in the space between the casing
and the tubing. It was not a successful strategy for long, because up-hole casing failures, due to external
corrosion, led to many millions of barrels being lost to shallow aquifers. The producing wells then had to
be systematically reconfigured for tubular flow at considerable cost. A secondary effect of this action was
to reduce well flow rates, which in turn meant additional drilling to offset the loss. But the high well rates
of 10,000 to 40,000 barrels per day from these wells easily justified the new costs, which collectively
totaled less than $2 a barrel.

Much of the onshore production in the United States is at the other end of the spectrum. Stripper
wells, producing less than ten barrels of oil per day, account for one-third of the country' production, or
s
about 2 million barrels of oil per day. When oil prices collapsed to nearly $10 a barrel in 1998, one-quarter
of the stripper production, amounting to nearly 500,000 barrels per day from 100,000 wells, was shut-in as
uneconomic. Clearly, the mature production of the United States faces very much higher per barrel
operating costs than is the case in the Middle East.

Maximum Efficient Rate (MER) operating costs manifest themselves in many ways. Reservoir
management is required to maximize value, while optimizing production and reserves. It calls for
continued monitoring, analysis and interpretation of reservoir pressures, fluid contacts, well tests, well
production volumes, and the types of fluids produced. Even time-lapsed seismic surveys have to be
evaluated. Oil field service companies provide bottom-hole pressure testing, surface volume testing and
well logging to assist the operator' technical evaluations. In-house or third party numerical simulation
s
models of the larger fields further help field development and production forecasting.

Compliance with State regulatory, environmental and safety legislation requires staff and
programs. It is necessary to perform, and report on, a wide range of tasks, including: field/well actual/test
volumes, well casing mechanical integrity tests (to avoid ground water contamination), flowline and
pipeline corrosion prevention and monitoring programs, high pressure and poisonous gas detection systems
and public alert systems, carbon gas releases, disposal of naturally occurring radioactive material and
drilling fluids. Oil spills have to be cleaned-up. Furthermore, such information has also to be
HC#2001/2-2-5
prepared for accounting and reporting purposes by royalty and working interest owners, which often

5
requires substantial operator staff overhead. It is not uncommon for a producing property to have as many
as 200 royalty and working interest owners.

The depletion of mature fields is characterized by declining production due to loss of reservoir
pressure and/or increased water production. Pressure maintenance by water or gas injection is often
required at considerable cost. Increased water production increases costs due to added separation and
disposal requirements. Declining gas fields require compression facilities to produce additional reserves to
a lower pressure. Depending on field geology and the reserve target, oil-well spacing may be progressively
reduced by infill drilling from 160 acres to 80, 40, 20 and even down to10 acres per well. Inevitably, wells
and processing equipment suffer mechanical deterioration and breakdowns, requiring partial if not total
replacement, particularly in aging operations after more than 25 years of service. Ongoing maintenance
programs for gas turbines, rotating and reciprocating equipment, electric generators, etc. are as necessary
as the regular oil change and tune-up in the family automobile.

Some crude oils deposit a waxy paraffin that must periodically be removed from wells, processing
facilities, pipelines and flowlines by mechanical or chemical means. Other wells are prone to carbonate
scales, which plug tubing with the onset of water production, and must be periodically cleaned out. Other
crudes form an emulsion with water that has to be broken down chemically or thermally before being
shipped or connected to pipelines. Often, wells must be repeatedly stimulated by acid treatment or
hydraulic fracturing to sustain economic flow rates. Expensive horizontal wells are in some cases drilled to
replace conventional wells subject to the coning or cusping of water or gas. EOR (Enhanced Oil Recovery)
projects are clearly expensive. Mostly, they represent a final attempt to extract the last remaining barrels
prior to abandonment. Thermal (fire flood and steam), miscible (CO2, nitrogen, hydrocarbon gas) and
chemical floods capture 5-15% additional reserves from the limited number of fields that are susceptible to
treatment, but at a cost of $10 to $15 dollars per barrel. Worldwide EOR production accounts for less than
5% of the total.

Offshore fields have nearly all the operating challenges and burdens of the onshore (save perhaps
the large number of royalty and working interest owners), but in addition face those imposed by the marine
environment. Supplies, drilling muds, work crews, etc. have to be ferried by helicopter, ship or barge.
Living quarters for workers are required. In Norway, for example, three people (vs. two in the USA) are
needed on rotation for each job, having to be housed, clothed, and fed. Round-the-clock standby safety
rescue vessels have to be maintained on position. Underwater surveys and environmental impact studies
are required. Oil spill contingency plans and clean up crews and vessels must be kept available. Shipping
traffic and, in some areas, even icebergs have to be monitored. Designing, building and installing
structures and facilities to withstand 100-year storms in water depths to 6,000 feet is obviously extremely
expensive. If deeper water is the future for oil and gas production, then higher costs will be the norm.

Clearly, the producing life of an oil or gas field is a dynamic process, involving an interplay of
geology, geography, politics, technology and market forces. Eventually, the field has to be abandoned
when the fixed and variable operating costs exceed the revenue. Even the abandonment of wells and
facilities, as well as the restoration of the site, including offshore platform removal, involve considerable
outlays, which must be carefully planned and executed.

In short, producing oil is not simply a matter of opening the tap, and the costs rise progressively as
the fields age for all the reasons enumerated above. In the past, much production could be won from new
fields in the prime of life, but now we face the soaring costs inherent in dealing with an aging population.
HC#2001/2-2-6

6
The Oilman' Column #7 - by L. F. Ivanhoe
s

A. CRITICAL FACTS

When he was running the Pentagon, James Schlessinger was fond of saying that everyone was entitled to
his or her own opinion, but not to his or her FACTS.

The objective of the CSM Hubbert Center is to collect and disseminate vital FACTS that help recognition
and analysis of the coming oil crisis. Emphasis is on long-term oil "climate" (e.g. discovery trends/El
Nino) rather than on short term oil "weather" fluctuations (e.g. oil prices/ice storms).

B. ALASKA' ANWR � A NATIONAL ASSET
S

How casually people dismiss ANWR' value. Using the USGS estimate of 10 billion barrels for the mean
s
recoverable oil at ANWR, the current value (@$30/barrel) is $30 x 10 billion = $300 billion or $300,000
million. Hardly an insignificant amount. This could fund U.S. Social Security/Medicare for all Americans
or provide money to fight foreign wars for other nations' oil fields. At least it would save the money rather
than being spent for OPEC oil. Money spent to recover the oil will go into the U.S. economy. If we buy
our oil from the Arabian Persian Gulf fields, we will be pushing poverty-stricken oil-less developing
nations into starvation. We have no inalienable right to burn up other nations' oil � especially when our
ANWR oil is so accessible. No other country would shelve such a valuable national asset.
HC#2001/2-3-7

H.C. NEWSLETTER For further inform a tion contact:

Hubbert Center Chairm a n Hubbert Center Coordinator
Prof. Craig W . Van Kirk L . F. Ivanhoe
Head of Petroleum Engineering Dept. 1217 Gregory St.
Colorado School of M i n e s Ojai CA 93023-3038
Golden CO 80401-1887
Phone 1-800-446-9488 Phone 1-805-646-8620
The M. KING HUBBERT CENTER FOR PETROLEUM Fax 1-303-273-3189 Fax 1-805-646-5506
SUPPLY STUDIES Internet Address: http://hubbert.mines.edu
located in the Departm ent of Petroleum Engineering
Colorado School of M ines
Golden, Colorado Notes:
This is one of the Hubbert Center's quarterly newsletters.
Please retain for reference.
The Hubbert Center has been established as a non-profit
organization for the purpose of assembling and study i n g The views expressed by authors of Center publications are
data concerning global petroleum supplies and their own, and do not reflect the opinions of Colorado School
dissem inating such inform a tion to the public. of M ines, its faculty , its staff, or its Departm e n t of Petroleum
Engineering.
The question of W H EN worldwide oil demand will
exceed global oil supply is stubbornly ignored. The The Hubbert Center welcomes pertinent letters, clippings,
world's oil problem s, timing and ram ifications can be reprints, cartoons, etc.
debated and realistic plans made only if the question is The Hubbert Center will archive work files of recognized
publicly addressed. A growing number of inform ed US experts in this field.
and European evaluations put this crisis as close as the Contributions to the Hubbert Center through the CSM
years 2000 - 2014. The form a tion of this center is to F O U N D A T ION INC. are tax-deductible.
encourage a m u l ti-field research approach to this subject. Reproduction of any Hubbert Center publication is authorized.

7
Colorado School of Mines, Petroleum Engineering Dept., Golden, CO 80401-1887
Quarterly Newsletters � Contents
(http://hubbert.mines.edu)
P. 1
1996-2001
DATE HCN# Newsletter Contents AUTHOR FIGURES/TABLES
REMARKS

Oct. `96 H.C. Dedication Newsletter
# 96/1-1 M. King Hubbert-Obituary 10/17/89 New York Times Photo
96/1-2 Oil Reserves and Semantics L. F. Ivanhoe Fig. 1, 2, 3
96/1-3 Cutting Gas Taxes Will Make Things Worse J. MacKenzie & K. Courrier Fig.1 (Petrol Prices)
Jan `97
# 97/1-1 King Hubbert � Updated L. F. Ivanhoe Fig. 1, 2, 3, 4, 5, 6, 7, 8
97/1-2 Cartoons/Quotations Cartoons 1, 2, 3
Apr ` 97
# 97/2-1 A European View of Oil Reserves Colin J. Campbell
97/2-1 Alternative Estimates of Global Ultimate Oil Prod. L. F. Ivanhoe Fig. 1
97/2-2 Quotation Jules Renard Quote 1
July `97
# 97/3 U.S. Conventional Wisdom and Natural Gas Joseph P. Riva Table 1
Oct `97
# 97/4 How Long Can Oil Supply Grow? Craig Bond Hatfield
Jan `98
# 98/1-1 Petroleum Position of the United States L. F. Ivanhoe Fig. 1, Table 1
98/1-2 Petroleum Positions of Canada and Mexico L. F. Ivanhoe Fig. 1, 2
Apr ` 98
# 98/2 Energy and Dollar Costs of Ethanol Production With Corn David Pimentel Table 1
July `98
# 98/3 Petroleum Positions of EX-USSR and China L. F. Ivanhoe Fig. 1, 2; Table 1
Oct `98
# 98/4 Shale Oil � The Elusive Energy Walter L. Youngquist
Jan `99
# 99/1 When Will the Joy Ride End? A Petroleum Primer Randy Udall & Steve Andrews Figures 9; Table 1
Apr ` 99
# 99/2 Is the World' Oil Barrel Half Full or Half Empty? It Depends
s Joseph P. Riva
Upon Whether You are an Economist or a Geologist!
July `99
# 99/3-1 Petroleum Positions of Brazil and Venezuela L. F. Ivanhoe Fig. 1, 2, Table 1
# 99/3-2 Foreseeable Permanent Global Crude Oil Shortage L. F. Ivanhoe Oilman' Column [1]
s
Oct `99
# 99/4-1 Deepwater Oil � The End of the End Game Colin J. Campbell
# 99/4-2 Operator Budgets Leaving Little for Frontier Exploration: Are Marshall DeLuca
the Frontiers Dead?
Jan 2000
# 2000/1-1 World Oil Supply-Production Reserves, and EOR L. F. Ivanhoe Fig. 1A, 1B, 2A, 2B, 3
2000/1-2 Oil Business � Upstream vs Downstream L. F. Ivanhoe Oilman' Column [2]
s
2000/1-2 World' Oilfields by Sizes
s Oilman' Column [3]Table
s
Apr 2000
# 2000/2-1 Petroleum Positions of U.K. and Norway-West Europe L. F. Ivanhoe Fig 1, 2; Table 1
2000/2-2 Claimed Oil Reserves : Major OPEC & Communist Countries L. F. Ivanhoe Table 1
1979-1999
2000/2-3 Groceries & Gasoline � Two Weeks' Supplies L. F. Ivanhoe Oilman' Column [4]
s
July 2000
# 2000/3-1 Oil and Australia Brian J. Fleay
2000/3-2 Gasoline Use Exacts Social Costs L. F. Ivanhoe Oilman' Column [5]
s
Oct 2000
# 2000/4-1 Exports � The Critical Part of Global Oil Supplies L. F. Ivanhoe Fig 1, 2: Table 1
2000/4-2 Petrophobia Joseph P. Riva

Jan 2001
# 2001/1-1 Petroleum Positions of Saudi Arabia, Iran, Iraq, Kuwait, UAE � L. F. Ivanhoe Fig. 1, 2, 3, 4, 5; Table 1
Middle East Region
2001/1-2 (A) Persian/Arabian Gulf Wars; (B) Foreign Countries' Oil; (C) L. F. Ivanhoe Oilman' Column [6]
s
Oil Price Shocks No. 1 (1973) and No. 2 (1979)
Apr. 2001
# 2001/2-1 Peak Oil: A Turning for Mankind Colin J. Campbell
# 2001/2-2 Oilfields � Maintenance Expenses Colin J. Campbell & J. J Zagar
# 2001/2-3 (A) Critical Facts; (B) Alaska' ANWR � A National Asset
s L. F. Ivanhoe Oilman' Column [6]
s