Dr. M. King Hubbert made the theory of peak oil public in 1956. The nutshell version is that since the world's supply of oil is finite, world wide production will increase until about half the supply is consumed, then production will reach a peak--at the end of the 20th century--and begin an irreversible decline. When the theory was first introduced, industry and government derided it as having little geological foundation. The US Energy Department stated in 2004 it was much more probable that any peak in oil production would not be reached until the middle of the 21st century. Industry analysts have always held out improvements in technology and increases in exploration investment as the way to avoid a supply crunch. But another aspect of the theory is that the easily recoverable oil will be consumed first. Then only supplies that exist in extreme environments and difficult to recover will remain--oil that is located deep undersea, in harsh climates, or in politically unstable regions. Developments in the industry as well as informed opinion seem to be indicating that the beginning of "tough oil" has been reached. The Wall Street Journal published an article on July 27 in which it reported the multinationals were making record quarterly profits (Exxon: $10.26 billion; Royal Dutch Shell: $8.67), but revenue and production targets are being missed across the industry because mature fields are depleting and new fields were increasingly hard and expensive to find and develop. According to the Journal , "Oil companies are struggling to find suitable opportunities to increase production while still making an adequate return."
Michael Klare, author of Blood and Oil, describes the obstacles to exploiting the world's largest new oil field outside the Middle East. The Kashagan field is located in the northern Caspian Sea off Kazakhstan and is estimated to contain 9-13 billion barrels of oil. It is the largest field to be developed since Alaska's Prudhoe Bay forty years ago. But the consortium developing it has experienced challenges from the region's harsh climate and difficult geological conditions. Oil deposits lie below a strata of high pressure gas and contain high levels of toxic hydrogen sulfide. The shallow Caspian Sea freezes over five months of the year, and is the breeding grounds for rare seals and endangered beluga sturgeon. Kazakhstan's uncertain legal structure has also created difficulties. BP pulled out of the consortium because of a tax dispute. While redistribution of it's 16% share was being negotiated, little development progress took place. Consequently, the price for launching the project has nearly doubled and initial production has been postponed until 2010. The Kazakh government was expecting "great success" in the form of billions in royalties by now, and is not happy with the delays. The Prime Minister has said he would consider replacing the Italian operator if it's execution of the project does not improve.
The giant Cantarell complex in Campeche Bay, Mexico, the largest field in the western hemisphere, is peaking. The complex was supplying 60% of Mexico's total production in 2005. In 2001 Cantarell wells were producing 9,000 barrels/day, about 9 times as much as the average Mexican well making the oil relatively inexpensive to recover. A leaked secret report by the Mexican state oil company (PEMEX) shows that the distance between the gas cap over the oil and salt water encroaching from below is closing fast. PEMEX production fell below 3 million b/d in December, 2006 for the first time in six years. The steep decline of 14-16% in the coming years at Cantarell has serious implications for the U.S. and Mexico. Mexico derives 37% of it's federal budget from oil revenue. It was exporting 1.8 bb/d mostly to the U.S. in 2005, but that level has dropped to 1.53 bb/d in 2006. Mexico has already warned U.S. importers that it will be unable to fulfill some existing contracts. Canada and Mexico are the U.S. biggest suppliers. Replacing reduced Mexican imports will be an expensive proposition.
The International Energy Agency reported in its medium term market report the worrisome conclusion that because world demand for oil will outpace new oil supplies, significant shortfalls are likely to occur in the next five years. To satisfy the rising global demand and replace dwindling accessible sources, five million barrels of new oil each year will have to be produced from countries like Iran, Iraq, Nigeria, Libya, Venezuela and a few other places not likely to inspire a capitalist investor. The National Petroleum Council estimates that $20 trillion in new investment will be required between now and 2030 to extract oil from difficult locations. That calculates to $3,000 per person alive today. Go figure--half of humanity earns substantially less than that each year. As the center of production shifts to OPEC and other state controlled producers like Russia, geopolitical factors, not market factors, will come to dominate the global industry. Any way you look at it, tough oil has arrived.
The giant Cantarell complex in Campeche Bay, Mexico, the largest field in the western hemisphere, is peaking. The complex was supplying 60% of Mexico's total production in 2005. In 2001 Cantarell wells were producing 9,000 barrels/day, about 9 times as much as the average Mexican well making the oil relatively inexpensive to recover. A leaked secret report by the Mexican state oil company (PEMEX) shows that the distance between the gas cap over the oil and salt water encroaching from below is closing fast. PEMEX production fell below 3 million b/d in December, 2006 for the first time in six years. The steep decline of 14-16% in the coming years at Cantarell has serious implications for the U.S. and Mexico. Mexico derives 37% of it's federal budget from oil revenue. It was exporting 1.8 bb/d mostly to the U.S. in 2005, but that level has dropped to 1.53 bb/d in 2006. Mexico has already warned U.S. importers that it will be unable to fulfill some existing contracts. Canada and Mexico are the U.S. biggest suppliers. Replacing reduced Mexican imports will be an expensive proposition.The International Energy Agency reported in its medium term market report the worrisome conclusion that because world demand for oil will outpace new oil supplies, significant shortfalls are likely to occur in the next five years. To satisfy the rising global demand and replace dwindling accessible sources, five million barrels of new oil each year will have to be produced from countries like Iran, Iraq, Nigeria, Libya, Venezuela and a few other places not likely to inspire a capitalist investor. The National Petroleum Council estimates that $20 trillion in new investment will be required between now and 2030 to extract oil from difficult locations. That calculates to $3,000 per person alive today. Go figure--half of humanity earns substantially less than that each year. As the center of production shifts to OPEC and other state controlled producers like Russia, geopolitical factors, not market factors, will come to dominate the global industry. Any way you look at it, tough oil has arrived.