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May 18, 2012

Scraping the bottom of the barrel

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Several articles in the international media in recent months have claimed that worries about peak oil – the peak and decline in yearly world oil production – are unfounded because vast new reserves of unconventional oil are coming on stream. But a closer look at these new sources of oil casts doubt on this assertion.

Data from the US Energy Information Administration show that conventional crude oil production – oil from wells accessed using typical drilling techniques – has been essen- tially flat at around 74-million barrels per day (mbpd) since 2005. Looking at the history of con- ventional crude oil discoveries, this is not surprising – they peaked in the mid-1960s and have been on a declining trend ever since.

Since 2005, all liquid fuels production – which includes natural gas liquids, biofuels, gas-to-liquids and unconventional oil – has been growing much more slowly than in previous decades – at less than 1% a year – while demand in the developing world has burgeoned. The trillion-dollar question is: For how much longer can growth in these unconventional sources of oil offset the declining production from existing conventional fields, estimated by the International Energy Agency to be depleting at about 6.5% each year?

There are three types of unconventional oil resources, namely heavy oil, oil sands and oil shale. Heavy oil, which is mostly located in Venezuela’s Orinoco belt, is denser and more viscous than conventional oil and requires special extraction and refining techniques. Oil or tar sands – the bulk of which is located in Canada’s Alberta province – consist of sandstone impregnated with heavy oil. Oil shale, found predominantly in the western US, is oil trapped in shale rock.

Technically, recoverable resource estimates for unconventional oil vary widely but are generally very large – possibly several times the roughly one- trillion barrels of oil consumed globally to date. But, economically, recoverable reserves are substantially smaller than total geological resources.

The methods involved in extracting oil from unconventional sources are quite different from those used to extract conventional oil. In the case of shale oil, extraction involves similar hydraulic fracturing processes used to extract natural gas from shale. Oil sands production is a massive surface mining opera- tion, followed by extensive use of natural gas to produce synthetic oil.

The hugely capital-intensive nature of these production processes means that marginal production costs – typically estimated at between $80/bl and $100/bl – are much higher than those of conventional oil. As the world shifts increasingly from conventional to unconventional oil sources, the floor under market oil prices will continue to rise.

The higher production costs reflect the most crucial energy variable of all: the energy return on investment (EROI) ratio, which measures the energy delivered by a process relative to the energy required to find, extract and process the energy resource. Experts estimate the EROI for oil shale and oil sands at about 4:1 at best, compared with a global average for conventional oil of about 18:1 today, and nearly 100:1 in the 1930s.

A further downside to unconventional oil is that its environmental impacts are significantly worse than those of regular oil. The freshwater demands are much greater and the carbon dioxide emissions can be up to twice as high for each barrel of oil. Fracking and oil sands production also pollute freshwater sources. These environmental costs are largely externalised, that is, the public pays for it indirectly.

Returning to peak oil – the key issue is the flow rate, that is, how much oil can be brought to market in a given year. There are economic and physical constraints on how much oil can be extracted from low-EROI, high-cost unconventional oil reserves, arising from the highly capital-intensive nature of this business.

Several peer-reviewed articles in academic journals have shown that the depletion of older, conventional-oil fields will soon outpace the gains from new unconventional oil sources. Chris Skrebowski, consultant editor of the UK-based Petroleum Review and director of Peak Oil Con- sulting, maintains a large database of current and forthcoming oil pro- jects. His latest forecast is that global spare oil capacity will be exhausted by 2015. After that, we are looking at a long downhill slide for total world liquid fuel production.

So, while there will be plenty of investment in unconventional oil sources, it will not materially change the peak oil phenomenon – at best, it will delay the date of the global peak of all liquids by a few years. And the switch to unconventional oil is setting a triple-digit floor to international oil prices, thereby putting brakes on global economic growth.

The bottom line is that the peak oil challenge has not gone away. If we do not intentionally wean our civilisation off oil quickly, we face increasingly severe economic shocks as well as intensifying climate destabilisation and environmental degradation as we burn dirtier fuels.

Edited by: Martin Zhuwakinyu
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