... fugit inreparabile tempus
Translation: Irretrievable time is flying (away)
— the Roman Poet Virgil (70 - 19 B.C), The Georgics
Peak oil is a sustainability issue. The Paris-based International Energy Agency (IEA) watches over the liquid fuels supply, the lifeblood of the economies of its clients, the OECD nations. Without a reliable, growing oil supply, these economies are in jeopardy. The latest Medium Term Oil Market Report (OMR) issues a stern warning in its first sentence. "Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2012." Has the IEA been converted to the peak oil position? The answer is yes and no.
The news stories accompanying the report seemed to confirm peak oil concerns. Here's an example from World will face oil crunch 'in five years' (Financial Times, reprint at ASPO-Ireland, July 10, 2007).
The IEA said that supply was falling faster than expected in mature areas, such as the North Sea or Mexico, while projects in new provinces such as the Russian Far East, faced long delays. Meanwhile consumption is accelerating on strong economic growth in emerging countries. The problem is exacerbated by the fact that supply from non-members of the Organization of the Petroleum Exporting Countries [OPEC] will increase at an annual pace of 1 per cent, or less than half the rate of the demand rise.
The widening gap between rising consumption and lagging non-Opec supply will force Opec to increase sharply its production in the next five years. Lawrence Eagles, head of the IEA's oil market arm, told the Financial Times: "If we get to the point were there is insufficient supply, the only way to balance the market will be through higher prices and a drop in demand."
Eagles refers to "insufficient supply" that will force demand down. Sounds good for the peak oil hypothesis, right? But look at the projected demand! The graph left (click to enlarge) shows the IEA's supply & demand forecast, which they call the "global balance". Demand is set at 95.82 million b/d by 2012. That's a 10% leap in five years, with an annual average increase of 2.2%. This is staggering growth. When Eagles refers to supply constraints on demand, he is not talking about a peak in the global oil supply. He is referring instead to possible shortfalls as weighed against the IEA's aggressive medium-term growth forecast.
The IEA's demand data1 for the last 5 years, including the 2007 projection, serves as an instructive point of comparison. Their data (graph left) shows the recent plateau that began at the start of 2005. Demand has averaged 84.28 million b/d through the 2nd quarter of 2007. (The IEA supply data is similar, averaging 84.85 million b/d through the 1st quarter of 2007.) Demand grew only 6.3% from 2003 through 2006. The anomalous increase in the 4th quarter of this year stands out — demand jumps to 88 million b/d. The IEA expects our oil thirst to continue at this level in 2008, when quarterly demand is forecast to average 88.27 million b/d, 2.13 million b/d above their 2007 estimate.
The IEA is a political organization, and its demand forecast should be seen in this light. Liquids demand that is not met outside of OPEC (non-OPEC) must be supplemented by the cartel — this is the call on OPEC (this column, May 2, 2007). The IEA and OPEC constantly squabble over what OPEC's production levels should be, where the bone of contention is their separate estimates of the non-OPEC production share. The IEA guesses low, while OPEC guesses high, saying the market is well supplied despite steeply rising oil prices. The IEA's mission requires them to urge OPEC to increase production to ease tight supply and prices. However, a close look at the Medium Term OMR reveals that the IEA is not lowballing their estimate. In revising their future non-OPEC supply estimate downward, they are trying to avoid past mistakes in which overly optimistic forecasts did not come to pass.
The IEA's bona fide field-by-field estimate of future non-OPEC production generally agrees with other forecasts regardless of whether their demand projections are exaggerated for political purposes. The growing consensus is reflected in the graph left from PFC Energy's Mike Rodgers (graph left, presented at ASPO-USA's Boston World Oil Conference, October 2007). Note that the graph contains the ExxonMobil non-OPEC forecast, which is entirely consistent with those of the IEA and PFC Energy. Note further that the IEA's demand forecast corresponds to PFC Energy's highest growth case. All three estimates include crude oil, condensate, the Canadian oil sands, and global natural gas liquids (NGLs), including — counterintuitively — those produced in OPEC countries. NGL's are not subject to OPEC quota restrictions, so their production is seen as market-driven, not restricted by policy.
The IEA non-OPEC forecast (see here) sees 2008 as being a very good year, but its almost all downhill from there. The supply section tells us the crucial considerations:
The "notable" plateau of non-OPEC conventional crude production also includes condensate after 2008 (graph left). The IEA's 4% net global decline rate equals the value calculated in Decline Rates and Non-OPEC Supply using data from the EIA, the Oil & Gas Journal, and Skrebowski's Megaprojects schedule (this column, April 11, 2007). Lewis Carroll's Red Queen dilemma, in which 3.2 million b/d must be put on-stream just to stay in-place, recalls Peak Oil -- The Power of Declines, which illustrates the problem by use of a modified version of Skrebowski's Oil-a-Gator graph (this column, April 4, 2007). In some ways, the IEA has definitely moved closer to ASPO-USA's position on non-OPEC production, not to mention that of PFC Energy and ExxonMobil.
The IEA's estimates for future production in Russia and the U.S. Gulf of Mexico illustrate their non-OPEC assessment methods. The EIA admits that its take on production Russia is hampered by a lack of specific field data. Russia is the key, because without increased output from there and the other Former Soviet Union (FSU) countries since the late 1990's, the world would be referring to the peak of production outside of OPEC in the past tense.
Despite the fact that Russia exceeded the IEA's expectations by an average of 250 thousand b/d in the 2001-2006 period, they have now revised their 2011 forecast downward almost 200 thousand b/d due mainly to an "uncertain ... investment climate and tight drilling/service capacity." During the 2009-2011 period, production in Russia's remote Far East will determine whether their output can continue to grow. Given the IEA's uncertainty about declines in producing fields (graph above left), it is surprising that they use a modest 3% baseline annual decline rate. The IEA sees Russia's output increasing to 10.6 million b/d in 2010, which is "well below published growth targets for producers like Rosneft, Lukoil and TNK-BP." Oil production then shows a modest decrease thereafter. Although the IEA states that it is too early to tell, they have forecast a peak in Russia's oil production in 2010 as things stand right now.
In the Gulf of Mexico, examined in The Gulf of Despair? (this column, June 27, 2007), the IEA forecasts that production will grow a modest 345 thousand b/d in the medium term, with the largest contributions coming from Atlantis and Thunder Horse (200 thousand b/d each). The IEA gives a long list of deepwater fields (p. 38) that should yield a net 1.1 million b/d addition by 2012, but temper their forecast by assuming a steep 15% baseline decline rate, and acknowledging the "tendency for deepwater fields to peak rapidly, followed by sharp decline." This assessment seems reasonable, but fails to recognize that some fields, like Murphy's Front Runner, have not produced at their anticipated capacity. There is also concern that Chevron's Tahiti may not live up to expectations.
The IEA's position on peak oil is summed up on p. 30 of the Medium Term OMR.
The concept of peak oil production and its timing are emotive subjects which raise intense debate. Much rests on the definition of which segment of global oil production is deemed to be at or approaching peak. Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak...
While there might be a temptation to extrapolate this trend, citing a peak in conventional oil output, a degree of caution is in order. Firstly, the concept of ‘conventional’ oil changes with time, technology and economics. In the early 1970s, much offshore production was deemed unconventional, but this portion of global supply has since grown to account for 30% of the total. Evolving economies of scale and infrastructure development could do the same for GTL, oil sands and ultra-deepwater reserves in the future, shifting today’s unconventional resource into tomorrow’s conventional supply category. Moreover, rapidly-growing condensate and NGL supply is scarcely ‘non-conventional’ in a technical sense now.
What is deemed "conventional" or "unconventional" liquids production is a red herring. The view here is that ultra-deepwater oil is conventional crude, and natural gas liquids are included in the definition of "oil" by default. The IEA is taking a standard economist's view of scarcity, in which substitutes such as NGLs, biofuels, gas-to-liquids, and oil sands support further liquids production growth as non-OPEC crude and condensate levels off. If one wants to split hairs, one could question whether the forecast outside of OPEC should include gas liquids from the Persian Gulf and North Africa, the lack of a quota restriction notwithstanding. An OPEC nation's investment and production policy may not make the same hard and fast distinction. Biofuels, and oil sands production are not likely to grow much in the medium term, as their own graph shows (2nd above, left). The prospective gas-to-liquids industry has been stopped dead in it tracks by rising costs. The IEA knows this, saying that ExxonMobil "cancelled the 150 kb/d Palm GTL project, reportedly due to doubling costs and reservoir complexity."
The IEA's report downplays the peak of non-OPEC crude and condensate production. Even if their crude, condensate, and gas liquids forecast is accurate, the implications beyond 2012 are troubling. Recent statements by IEA head Claude Mandil and chief economist Fatih Birol, documented by Jerome á Paris (The Oil Drum, Europe), reflect their urgent worries about the the longer term. The IEA Medium Term Oil Market Report take significant steps toward acknowledging the peak oil problem. For this, they should be commended. However, making fine distinctions about what counts as "conventional" liquids production, and what does not, is not helpful in motivating the world to pay attention to critical problems with the oil supply in the next decade.
1. The IEA provides a glossary of terms. Demand is defined as "total inland deliveries plus refinery fuels and bunkers minus backflows from the petro-chemicals sector. It is thus equivalent to oil consumption plus any secondary and tertiary stock increases." Supply consists of all the different types of liquids the IEA tracks, which presumably corresponds to all produced liquids. One assumes that liquids not consumed end up in primary stocks.