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Wednesday, December 7, 2011

Peak Oil II: Oil Production by Hemisphere

Daniel Yergin, author of “The Prize” and “The Quest”, chairman of Cambridge Energy Research Associates, recently wrote an interesting opinion for the Washington Post.  Yergin speaks of a new world oil map, centered not on the Middle East, but centered in the Western Hemisphere.   Yergin cites production from Canadian oil sands, shale oil in the United States, and deepwater discoveries in Brazil, as remaking the global oil map.
Is Yergin right?   Does this make any sense?

In a nutshell, by my review of the data it does not make sense, at least in the near term.  New sources of oil in the Western Hemisphere will require massive amounts of capital, and long lead times for the accumulation of physical capital (rigs, processing plants, pipelines, etc.).   Oil sands production will be limited by available water and gas resources, and oil shale production will be constrained by land use issues and environmental opposition.   All of these sources of production will have low Energy Return on Energy Invested, meaning that there is little excess value to encourage investment, or to allow government support or taxation.  (See my earlier post regarding EROI
Let’s look at some data.
This figure is available as an interactive graphic on-line:

The Middle East is the largest petroleum producing region.   Production in 2008 was over 26 million barrels per day; production has also been increasing faster than any other region for the past two decades.    On average, Middle East oil production has increased 2.6% annually for over two decades.  The Eastern Hemisphere produces 62 million barrels per day (2008) or 75% of global supply.  The Western Hemisphere produces 20 million barrels per day, or 25% of global supply. 

Now let's look at the new production sources cited by Daniel Yergin.
Canadian oil reserves are reported to be 2nd largest in the world, behind Saudi Arabia.  Canadian reserves consist of 5 billion barrels of conventional oil, and 173 billion barrels of oil sands.  Properly speaking, the oil sands are not reserves, but contingent resources.  The capital and resources required for production must be obtained, before the oil sands can be classified as reserves.   Resources are not production.  Canadian geologist David Hughes estimates that oil sands production will be limited to 2.5 million barrels per day, due to limits on natural gas and water required for production, and light oil dilutants required for transportation.

Canadian production is currently 3.2 million barrels.   Production is expected to increase by about 1 million b/d by 2020.

North Dakota currently produces 350,000 barrels per day; there are estimates that production could double within a decade, and pipeline capacity is being constructed to carry 1 million barrels per day.
It is likely that success can be duplicated in other regions (Eagle Ford shale, Texas; Niobrara shale, Great Plains; Green River Shale, Wyoming).  According to a US Government report, an aggressive goal for shale oil development in the United States would be 2 million barrels per day by 2020.

Brazil produces 2.6 million barrels per day (2009 data).  Brazil’s production has been increasing at about 4.5 % per year, and could add another 1.3 million barrels per day in ten years.  New exploration discoveries are located in deep water offshore Brazil's southern coast, and are found under a thick layer of salt.  Although new reserves may total 40 billion or 50 billion barrels, these will be very expensive and difficult fields to develop.
To sum up, expected incremental production in the Western Hemisphere is about 4.3 million barrels per day by 2020.   If all other production remains constant, the Western Hemisphere share of global production would increase from 25% to 28%, a noticeable increase, but in no way does this re-center the world oil map on the Western Hemisphere. 
It is true that Canadian oil sands, U.S. oil shale, and Brazilian deepwater discoveries represent large oil resources.  But development will require massive amounts of capital, long lead times, and are subject to limits of necessary resources.   Much of this development will also be subject to strong environmental opposition.

What was Yergin thinking?   He is focused on contingent resources, rather than proved, production-ready reserves.  He may be focused on potential investment opportunities for Western oil companies.  In the very long run, it may be possible to significantly increase Western Hemisphere oil production, but only with high investment costs and long delay, and it is unlikely to shift the geopolitical balance of Western dependence on oil from the Eastern hemisphere.

Yergin poses a good question.  Where will future oil production come from?   I'm preparing two additonal posts; one regarding the likely location and size of future oil discoveries, and another regarding oil production forecasts to the year 2030.
Posts written after this article considered other aspects of Peak Oil.  In each, the Eastern Hemisphere shows potential from more future production than the Western Hemisphere.  The Eastern Hemisphere shows greater potential for future oil discoveries; greater potential for increasing recovery from existing oil fields; and greater potential from discovered, but undeveloped new fields.

Peak Oil III:  Forecasting Future Oil Discoveries:
Historical trends show that about 100 billion barrels of new reserves will be discovered in the Eastern Hemisphere by the year 2030, while only 67 billion barrels will be discovered in the Western Hemisphere.

Peak Oil IV:  Recognition Lag and Reserve Growth

Mature giant oil fields in the United States have produced about 35% of original oil in place, and are approaching the technical limit of recovery.   Globally, and particularly in the Middle East, giant oil fields have only produced about 22% of original oil in place.  There is greater potential for reserve growth in the Eastern Hemisphere than the Western Hemisphere, as re-development, secondary and tertiary recovery methods are applied to these fields.

Peak Oil V:  Discovered, Undeveloped Reserves in the Middle East
Production from the Middle East has been dominated by a small number of giant and supergiant fields.   The large fields imply the existence of many smaller fields which have not yet been developed or produced.  About 1300 fields without significant production are indicated in summary tables; these may contain about 300 billion barrels.   Again, the advantage is to the Eastern Hemisphere.
References and Credits:
Many thanks to Carleton '78 classmate Anne Croley, who brought the Daniel Yergin article to my attention.

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