Development lead time and oil supply

on Aug 31 in Peak Oil tagged by Trevor Hicks

Reader Andrew asks:

Doesnt it take 10 years to get an oilfield “online”? It makes 3 years not seem long enough to get any more production going

In response to my wondering why the skeptics fail to address the fact that oil supply did not increase from 2005 through 2008 despite a tripling of the price.  Peak Oil is often dismissed by the belief that normal market forces of supply, demand and price along with the continuous march of technology will ensure that oil supplies are adequate for the forseeable future. The recent observed history of oil prices and supplies seems contrary to this expectation. And one more aside comment, I have linked my Facebook page to this blog so I get comments there that aren’t publicly available on the blog.

Andrew’s question is a good one, it would explain the lack of supply response by claiming that the lead time for a meaningful increase is too long for a mere three year run in prices. I will respond in a couple of different ways.

First, let’s assume that the lead time for meaningful supply growth is long, maybe not ten years, but let’s say it is five. We are still in a bit of trouble, look at how quickly investment dropped off from 2008 to this year. And even with prices at what you would think is a fairly robust level the last few months in the 50s, 60s and now the 70s, investment is still slow. In other words, it would appear that sustained prices over $100 per barrel are required to get the industry to make the level of investment necessary to grow supply. That may not be Peak Oil, but it’s a different world from the one we’ve been living in.

Second, ten years is the time that’s estimated as how long it would take to get from seismic to commercial production in ANWR. That’s probably around the outer limit for anywhere in the world considering the combination of political, environmental, product transportation and technical challenges in ANWR is about as difficult as anywhere.  Maybe the Arctic will be tougher.  But as I mentioned in an earlier post, we aren’t going to ‘discover’ our way out of Peak Oil, the overall trend of new discoveries being smaller and more remote is showing no signs of reversing despite a few high profile finds in recent years. The bulk of the investment needed to match depletion is in brownfield development - infill drilling, hydraulic fracturing, enhanced oil recovery techniques like SAGD for heavy oil deposits and waterflood and CO2 injection. These techniques have short term or immediate impact on production rates and globally the industry bought a lot of those kinds of services in recent years without nudging supply upwards at all.

I should also point out that Peak Oil is certainly more than a geological or technical phenomenon. There are lots of factors constraining the growth of supply: environmental (ANWR), political (Venezuela, Mexico, Nigeria, Iraq, Iran), lack of personnel, lack of deepwater rigs, rusty land rigs. Another difficulty is that in normal markets high prices are their own cure. Indeed, high oil prices caused this recession and have destroyed quite a bit of demand in the process. But consider that high prices also mean high incomes for producers, that OPEC subsidizes consumption of oil by its own populations to an amazing degree - gasoline is about a quarter per gallon in Venezuela or Iran. As OPEC’s ability to grow supplies is limited, it still has less to export because its own internal consumption is growing. When prices rebound, paradoxically, the amount of oil available to export from OPEC will drop as its now wealthier population can afford to consume even more. The growth in OPEC consumption in constraining supplies available on the world market is a material factor like the growth in demand in India and China.

A huge problem we have is that nobody seems capable of sustaining investment across the down cycles. Look at the plummet in rig counts and big layoffs the past twelve months. Every time we go through this the industry comes back a little weaker and a little less capable of making that supply grow.

Don’t get me wrong, I’m not stocking up on dry goods, guns and ammo for when the s— comes down or whatever. But I do think we are in for an undulating plateau of scarce supply cushion(2005-7) leading to high prices (2007-8) leading to global recession (2008-9,10) leading to low prices (2008-9), leading to increased consumption and repeat. Each cycle will lead to higher transportation costs, though, and a reduced standard of living in the OECD. I just think we should be prepared to cope with that.