Oliver L Campbell : Is peak oil imminent?

I have just read an article by Brendan Coffey with the title "Has peak oil arrived?" The short answer is "no" since OPEC has ordered its members to shut in production in order to keep up prices. Until the world economy picks up, there will still be a surplus of oil available.

Peak oil has not so much to do with recoverable oil in the ground, as Mr Coffey says, but rather that, as demand increases, a point is reached where production can no longer meet demand. Oil reserves can exist but if they are not produced in a timely fashion--development projects are delayed or not carried out for one reason or another--then peak oil can be reached.

Heading up of those who affirm peak production is imminent are Colin Campbell, an eminent geologist, and Jean Laherrère, a well-known petroleum engineer. Their book, "The end of Cheap Oil," published in March 1998, is obligatory reading. Their main assertions were: a) no large oil provinces are left to be found, b) technology will not significantly increase oil ultimately recovered, and c) substitutes, including renewables, will not markedly delay the onset of peak oil.

Leading the other camp, which believes peak oil is some way off, is the economist Michael Lynch who affirms: a) recoverable reserves are always understated and increase as further development takes place, b) technology is important and will raise the recovery factor over time, and c) though price does not increase the oil in place, higher prices allow higher cost oil to be produced.

Colin Campbell and his adherents in The Oil Depletion Analysis Centre have predicted the years 2000, 2006, 2008 and 2010 for peak oil. Chris Skrebowski, the editor of Petroleum Review, put it at 2010 plus or minus two years. He could not foresee the economic downturn caused by the world's bankers, but that is the trouble with predictions--something unexpected happens to vitiate them.

I am firmly in the Michael Lynch camp which believe peak oil is at least twenty years away, but I readily admit there too many unknowns to be truly certain. There is a correlation between energy consumption and economic growth--China, India and Brazil are creating greater demand and other developing countries will follow suit. But developed countries want to move in the other direction and reduce oil consumption by looking for alternatives. These include switching to non-associated gas, including gas from shale rock, and coal-bed methane. They are developing renewable energy projects for generating electricity and will build nuclear power plants. They intend to reduce gasoline consumption by making hybrid vehicles and those which run solely on batteries, compressed natural gas or hydrogen. Pressure to lower carbon emissions and reduce dependency on foreign imports will give impetus to ongoing research.

Since Messrs Campbell and Laherrère said no more large oil provinces would be found, oil has been discovered in large quantities offshore--. the Bay of Bohai, the Gulf of Mexico, Angola and Brazil. The last three, in very deepwater and far from land, are costly to produce and it is a question of prices not falling below the current level. Other possibilities include the Beaufort Sea and the Barents Sea. Also, it only needs technologies like THAI (Toe to Heel Air Injection) to be successful and increase the recovery factor in old and new reservoirs to make a lot more oil available.

Mr Coffey makes this statement which I just cannot believe, "About 10 years ago, OPEC sources indicated Saudi Arabia needed to sell a barrel of oil at $18 to break even." But a figure of $18, when the average price of West Texas Intermediate (WTI) ten years ago was $25, means they only made $7 a barrel. In 1998, the WTI average price was $15 a barrel so Saudi Arabia made a loss of $3 a barrel. No way. Average production cost probably did not exceed $3 a barrel--the country has some wells that produce 10,000 barrels a day. To assert breakeven two years ago rose to $26 a barrel seems equally unbelievable.

The statement, "OPEC members like Venezuela and Iran are estimated to need over $95 to break even on their costs" is patently untrue. If that were so, they would all be losing money as the WTI average for 2010 to date has not reached $80 a barrel. In 2007, Venezuela realised $65 a barrel from its export sales, and this produced a government take of some $45 billion. Venezuela's crude oil exports are currently realising around $68 a barrel and, if not as high as the country would like, the aspiration is for $80 a barrel, it still produces a reasonable income.

The fact is oil will still be the kingpin for many years to come and substitutes and renewables will only gradually have an impact on oil production. Predicting peak oil is a mug's game because there are so many variables but, on balance, I do not believe it is imminent. If you want me to stick my neck out, I should not expect it to occur before the 2030s.

Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.

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