When will the oil run out? Never!

Editor Neil McNaughton, inspired by BP Group chief economist Spencer Dale, looks to the end of the oil age. Oil and gas is never going to ‘run out.’ But can shale really act as a price regulating mechanism? Fast ramp up of production requires finance which may not be forthcoming next time around. Rapid decline does not benefit the holders of junk bonds! And then there is COP21...

In his presentation to the Society of business economists annual conference in London last month, Spencer Dale, BP Group chief economist, questioned one of the tenets of the oil industry – that ‘Oil is an exhaustible resource and that it will eventually run out.’ Dale argued that growing concerns of carbon emissions and climate change mean that it is ‘unlikely that the world’s reserves of oil will ever be exhausted.’

I agree, but I don’t think that you have to invoke concerns over global warming to reach the same conclusion. In our September 2002 issue we heard Shell researcher Michiel Groeneveld observe that fossil fuels ‘have proved far more abundant than previously thought’ and that was before shale! In a throwaway remark, Groeneveld added that the ‘oil age’ will not end because we run out of oil, no more than the Stone Age ended because we ran out of rocks!

So how did the Stone Age end? In so far as stone is still in widespread use, it never really did ‘end.’ Instead, stone got downgraded as a primary source of almost everything as it was replaced by bronze, then iron and so on. Humanity had learned the magic of substitution!

Today, stone is still in widespread use. A metric tonne of decent rock is worth around $100 to those who build roads and railways. There is an awful lot of rock ordinaire in the Paris basin, where I live, whose notional value exceeds the world’s annual GDP many times over! Rock has value, but (as far as I know) it does not have a huge cohort of entrepreneurs and geologists chasing around looking for more of the stuff.

Everyone knows where rock is. Back in the day, the Romans quarried rock from beneath Paris itself, leaving underground ‘catacombs’ that you can visit now. This practice stopped when its ‘social acceptability’ was questioned by those living in large sections of the city that were collapsing into the holes.

Shale has further demonstrated that the oil and gas business will not end because of a lack of oil. The paradigm shift from localized oil or gas ‘fields’ to basin wide targets for ‘factory drilling’ means that at any time in the future, there will remain huge reserves of oil and gas (just as there are huge reserves of rock), that are too deep, not ‘sweet’ enough, too far away or inaccessible in other ways to make them exploitable.

Oil and gas are never going to ‘run out.’ Before we are looking for ways to extract ultra-deep shale oil from the world’s basins at a cost of thousands of dollars per barrel, substitution by renewables or perhaps by coal will take place*. If that does not convince you, think of thousand meter deep tar sands, deepwater methane hydrates or offshore oil shale which must be off the scale in exploitability but which are probably in somebody’s reserves estimate someplace.

So next time you read about how much oil there is left (a trillion or so barrels is a popular number) reflect on how much ‘regular rock’ there is left and how unexciting is the ‘economic potential’ of zillions of cubic kilometers of the stuff.

Dale made another point with which I am less in agreement. He stated that shale has changed the economics of the industry in that, compared to conventional oil and gas, shale is quick to bring into production but that its production declines quickly.

Dale concludes from this that ‘As prices recover, investment and production can be increased quickly. As prices fall, supply will decline, mitigating the fall in oil prices.’ I think that this is a specious argument on both counts.

It has to be said, it takes an economist to find virtue in a high decline rate! It is unlikely that the ‘dentists of Chicago’ will be so enthusiastic when they are asked for another contribution to the next round of fracking frenzy. Imagine the sales pitch, ‘Just buy our junk bonds at 10% and wait till that 75% decline rate kicks in and saves the day for Opec!’

Dale implicitly recognizes this when he says, ‘It seems quite likely that the scale of funding that enabled the US shale revolution to expand at the pace it did over the past 4 or 5 years would not have been available [without] central banks’ quantitative easing encouraging investment in riskier assets.

So, when the oil age ‘ends,’ there will be lots of the stuff left. What happens in the interim depends on externalities like wars, the acceptability of nuclear generation, COP21 considerations and the cost of renewables. In the interim, worldwide oil ‘reserves’ will come and go. Shale ‘spots’ will sweeten and sour. Deep offshore will be on and off the agenda. Folks who build massive LNG terminals will look stupid or smart. When we ask ‘how much oil is left?’ we are asking the wrong question.

The right question should be something along the lines of the ones that the SEC asks oil and gas companies in their reserves reporting. As you can see from our summary of the Ryder Scott reserves conference (page 5), this has become a very touchy subject in the current climate, involving considerations of hedging, junk finance and ethics.

The other question, when will the oil age ‘end’ is a complete imponderable. The industry (including myself) would like to see it go on for a while. A lot may depend on the outcome of COP21 which I propose to discuss next month along with a report from the ‘sustainability’ session at the SPE. Meanwhile you can read about the parlous state of what seems now like the ‘ugly sister’ of sustainability, carbon capture and sequestration, in our report from CATO2 on page 7 of this issue.

* But don’t think of ‘King Coal’ as being cheap forever. It suffers from all the same issues as oil, gas and … rock!


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