Press Release

CAMBRIDGE, Mass., November 14, 2006 – In contrast to a widely discussed theory that world oil production will soon reach a peak and go into sharp decline, a new analysis of the subject by Cambridge Energy Research Associates (CERA) finds that the remaining global oil resource base is actually 3.74 trillion barrels -- three times as large as the 1.2 trillion barrels estimated by the theory’s proponents -- and that the “peak oil” argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future.

“The global resource base of conventional and unconventional oils, including historical production of 1.08 trillion barrels and yet-to-be-produced resources, is 4.82 trillion barrels and likely to grow,” CERA Director of Oil Industry Activity Peter M. Jackson writes in Why the Peak Oil Theory Falls Down: Myths, Legends, and the Future of Oil Resources.  The CERA projection is based on the firm’s analysis of fields currently in production and those yet-to-be produced or discovered.

“The ‘peak oil’ theory causes confusion and can lead to inappropriate actions and turn attention away from the real issues,” Jackson observes.  “Oil is too critical to the global economy to allow fear to replace careful analysis about the very real challenges with delivering liquid fuels to meet the needs of growing economies.  This is a very important debate, and as such it deserves a rational and measured discourse.

This is the fifth time that the world is said to be running out of oil,” says CERA Chairman Daniel Yergin.  “Each time -- whether it was the ‘gasoline famine’ at the end of WWI or the ‘permanent shortage’ of the 1970s -- technology and the opening of new frontier areas has banished the specter of decline.  There’s no reason to think that technology is finished this time.”

The report emphasizes the importance of focusing on the critical issues.  “It is not helpful to couch the debate in terms of a superficial analysis of reservoir constraints.  It will be aboveground factors such as geopolitics, conflict, economics and technology that will dictate the outcome.”  The report also points to such aboveground questions as timing and openness to investment, infrastructure development, and the impact of technological change on demand for oil

Undulating Plateau

The new report describes CERA’s liquids supply outlook as “not a view of endless abundance.”  However, based on a range of potential scenarios and field-by-field analysis, CERA finds that not only will world oil production not peak before 2030, but that the idea of a peak is itself “a dramatic but highly questionable image.”

Global production will eventually follow an “undulating plateau” for one or more decades before declining slowly.  The global production profile will not be a simple logistic or bell curve postulated by geologist M. King Hubbert, but it will be asymmetrical – with the slope of decline more gradual and not mirroring the rapid rate of increase -- and strongly skewed past the geometric peak. It will be an undulating plateau that may well last for decades. 

During the plateau period in later decades, according to the CERA analysis, demand growth will likely no longer be largely met by growth in available, commercially exploitable natural oil supplies.  Non-traditional or unconventional liquid fuels such as production from heavy oil sands, gas-related liquids (condensate and natural gas liquids), gas-to-liquids (GTL), and coal-to-liquids (CTL) will need to fill the gap.

Critical Issue

CERA argues that understanding the difference between a plateau and a peak followed by a precipitous decline, as well as the timing of events, is critical to the global energy future.  “Corporations, governments, and other groups, including nongovernmental organizations, need to have a coherent description of how and when the undulating plateau will evolve so that rational policy and investment choices can be made,” according to the report.      

“It is likely that the situation will unfold in slow motion and that there are a number of decades to prepare for the start of the undulating plateau.  This means that there is time to consider the best way to develop viable energy alternatives that would eventually provide the bulk of our transport energy needs and ensure that there is a useable production stream of conventional crude for some time to come,” CERA concludes.

Peak Theory Shortcomings

The CERA review also finds that current “peak oil” advocacy suffers from several problems:

• The peak argument is not presented in the context of a credible systematic evaluation of available data; its proponents have not made available a transparent and detailed analysis that would allow an objective and rational discussion.  At base “their methodology is to impute decline curves against currently proven reserves and declare that the game – and the argument – is over.”
• The underlying analytical model formulated by the late M. King Hubbert both fails to recognize that recoverable reserve estimates evolve with time and are subject to significant change, and it also underplays the substantial impact of technological advances.  Consequently, total annual production at the high point in 1970 was 600 million barrels higher – 20 percent -- than Hubbert’s projection of peak production for the US Lower 48, although he correctly anticipated its timing within two years.  
• Hubbert’s method requires accurate knowledge of the ultimate recoverable reserves of an area, but his 1956 analysis could never have incorporated the impact of giant discoveries in Alaska and the deepwater Gulf of Mexico, and therefore couldn’t have predicted the production profile for the U.S.  As a result, total cumulative U.S. production between the high point in 1970 and 2005 exceeded Hubbert’s predictions by the equivalent of more than 10 years of US production at present rates.
• Hubbert-posited post-peak reservoir decline curve assumptions are rebutted by observation that the geometry of typical oilfield production profiles is often distinctly asymmetrical and does not generally show a precipitous mirror-image decline in production after an apparent peak, even without the application of new technology or enhanced oil recovery techniques.  As a result, in the US Lower 48 where Hubbert came closest to accurately forecasting a peak, oil production in 2005 was some 66 percent higher than projected by Hubbert, and cumulative production between 1970 and 2005 was some 15 billion barrels higher, a variance equal to more than eight years of US production at present rates.
• Those who believe a peak is imminent tend to consider only proven remaining reserves of conventional oil, which they currently estimate at about 1.2 trillion barrels.  In the view of many petroleum geologists, this is a pessimistic estimate because it excludes the enormous contribution likely from probable and possible resources, those yet to be found, and plays down the importance of unconventional reserves in the Canadian oil sands, the Orinoco tar belt, oil shale and GTL projects.  CERA believes the global inventory is some 4.8 trillion barrels, of which about 1.08 trillion barrels have been produced, leaving 3.72 trillion conventional and unconventional barrels, an order of magnitude that will allow productive capacity to continue to expand well into this century.
• The “peak oil” argument is frequently supported with data indicating that new exploration finds are not sufficient to replace annual production.  Their data sets have serious deficiencies.  The peak argument is an incomplete and therefore misleading analysis because it ignores the role of development (vs exploration) projects in expanding reserves, fails to understand economic factors that can point company and national strategies to emphasize development vs exploration work. By focusing on “discovery” and ignoring the increased knowledge and confidence about field volumes, it disregards the fact that revisions, additions and exploration together have generated resource growth of 320 billion barrels – 80 billion barrels more, or one-third more, than total production – during the period from 1995 to 2003.  CERA draws both on its own data bases and those of its parent company IHS, which has the world’s most complete proprietary data bases on oil production and resources.
• Hubbert’s method does not incorporate economic or technical factors that influence productive capacity; most importantly, it ignores the impact of both price and demand, both major drivers of production.
• Peakists’ projections of the date a peak would be reached continue to come and go, the most recent targeted around Thanksgiving Day 2005, give or take a few weeks.

Signposts

“It is no longer sensible to allow the issues about future supplies to be clouded in a debate grounded in a flawed technical argument,” the CERA report concludes.  “There is general agreement that a peak or plateau of sorts will develop in the next 50 years, and it is not helpful to couch the debate in terms of a superficial analysis of reservoir constraints.”  The report emphasizes the importance of the aboveground factors cited earlier.          

“There is a need to identify the signposts that will herald the onset of the inevitable slowdown of production growth and ensure that policymakers outside the energy community have a clear understanding of possible outcomes and risks.”

Cambridge Energy Research Associates (CERA), an IHS company, is a leading advisor to energy companies, consumers, financial institutions, technology providers, and governments.  CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy.  CERA is based in Cambridge, Massachusetts, and has offices in Bangkok; Beijing; Calgary; Dubai; Johannesburg; Mexico City; Moscow; Mumbai; Oslo; Paris; Rio de Janeiro; San Francisco; Tokyo; and Washington, DC. 

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