A Lot of Money Equals 'A Little Oil'
Excerpted from 12 October 2009 edition of Peak Oil Review, published weekly by the Association for the Study of Peak Oil - USA
ASPO-USA: Are the projects sufficient to satisfy plateau production for a number of years, or do you think we’re headed for a decline in overall world production?
Sadad: The way you have to look at long-term supply is as a function of several factors. There are the technical factors: reserves, decline rates, depletion. There are the economic factors: investment rates based on price, based on the outlook for profitability. There are opportunity issues: access to exploration areas, access to depleted fields that maybe could benefit from enhanced recovery. And then there are the general geopolitical issues: can you get access to some areas; instability in Nigeria; Venezuelan domestic policy; Russian policies. So the long term is not strictly technical; it’s technical, political and economic.
At the same time, when we look at the technical side, yes there are many resources that have not been tapped. You could go to coal-to-liquids, you could go to gas-to-liquids, you could go to the ultra-deep ocean and Arctic regions, but these are all far more expensive and there is a ceiling to what the global economy can afford for energy. Roughly speaking, once you get to five to six percent of the global GDP being spent on oil, that’s about the ceiling. You cannot just assume that people will pay the price at higher and higher costs. For that reason, I do think we do have a boundary, we do have a limit to what is available with current technologies, in terms of supplementing supplies.
However, you can mitigate demand. You can be more efficient, and that may be the hidden opportunity whereby, through improving the energy efficiency, we can use far less of the oil and gas to make them go a lot further. So yes, in a way there is a plateau, but the plateau is not a crisis; it’s an opportunity to be more efficient.
ASPO-USA: Two years ago you said, “the normal economic theory is not working in this case and that’s because there are ceilings in the oil industry that won’t allow the normal equation to work.” Can you follow up on that thought with where world oil production is today?
Sadad: The nature of the oil industry is such that it takes a long time to deliver additional capacity. And at the same time it’s becoming evident that the resources to deliver additional capacity…the resources are not there. To give you an analogy, yes we can put a man on the moon, we can put 10 men on the moon…can we put 10,000? There aren’t the resources. The oil industry is being pressed to deliver a huge amount of oil—we’re producing 85 million barrels a day, with forecasts going to 100-plus million barrels a day. So, overcome declines, add new capacity, and do this on a sustained basis at affordable prices, and that’s where the economics are breaking down. You don’t have the logistics, you don’t have the industry infrastructure, and the costs are climbing. We just witnessed that when you have semi-submersibles that are running you $500,000 to $600,000 a day to operate, you can’t afford cheap oil any more. That’s the reality.
So the economics have broken down. It’s not a matter of you throw a little money and you get a lot of oil; it’s now you throw a lot of money and you get a little oil.
ASPO-USA: Can you comment on what you think is a likely scenario for oil production from Iraq?
Sadad: As a petroleum engineer, Iraq is a very interesting opportunity. Iraq has had oil discoveries from the turn of the last century. Historically, many of its giant fields have been produced with very high numbers for a very long time, whether it’s Rumaila or Kirkuk or others. They are mature. And the numbers often quoted for Iraq are very high—115 billion barrels is what I think they now report. Some of my Iraqi friends who have worked in the industry tell me the proven number is more like 70 billion. But even that, if we agree on that as a number, to produce a mature field you need reservoir energy; you need to maintain the reservoir depletion situation process. You can either do that with water injection or gas injection, and you need artificial lift. Where is the water going to come from in Iraq? If you are going to produce Rumaila at 3 million barrels a day, as has recently been proposed, you are going to need to inject perhaps 1.5 barrels of water (or the equivalent in gas); that has to be processed seawater. There is no system [for that] in place; nobody is working on it.
There is no national plan for Iraq to develop its resources. The postage stamp approach of every company takes a field and decides what to do with it doesn’t give you a national program, doesn’t give you an integrated process. If you add up all the capacities that are being talked about—7 to 8 million barrels a day—where is the natural gas going to come from to maintain pressure and deplete the reservoirs? These are fields that have been mature for a long time.
So I think Iraq is doing a fantastic job at trying to sustain its current production. There are a lot of very skilled people there, very good engineers and professionals. I think they are very challenged; they have to rebuild a country, not just an industry. They need power, they need transportation, they need communication, and—more important than anything, probably—they need an organization. Iraq will probably come back up to 2.5 to 3 million barrels a day, perhaps 4 million; I think that would probably be the ceiling. That’s about as much as Iran produces.
ASPO-USA: Can you comment on what you think Iran’s future production looks like?
Sadad: Iran is a very strange situation because they do have huge reserves, they do have massive fields. However, they are very mature; roughly 3 million barrels a day of capacity from Iran comes from fields that are more than 50% depleted in terms of reserves. So they have a real issue in terms of reservoir maturity. They are very keen on increasing gas injection into their fields which have a very anticlinal kind of structure—many of them very steep anticlines—and they feel that by injecting gas they will get better gravity drainage. However, they need huge volumes of natural gas. They talk of needing 10 billion cubic feet a day of gas injection; they currently inject about 3. To get that gas, they have to develop their non-associated gas fields…in this case, South Pars. But South Pars has been pretty much delayed due to the embargo on Iran’s gas development and in general on their oil industry. So Iran is running into this predicament of needing to improve its recovery through gas injection to sustain capacity but not having access to its own domestic gas for lack of technology. And also they have a strong requirement for domestic gas in general. So ironically, while Iran has the world’s second-highest gas reserves—over 1,000 trillion cubic feet—they are not an exporter of gas; they are a net importer of gas, in fact they import a little from Turkmenistan. So this is the paradox of Iran: they claim 130 billion barrels of oil reserves, they claim over 1,000 trillion cubic feet of gas reserves but they are not able to produce more than 4 million barrels a day and they can’t even export gas. It’s a real tragedy in a sense.
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