HAMM: I once knew a madman who thought the end of the world had come ... It appears the case is ... was not so ... so unusual.
-- Endgame, by Samuel Beckett.
Maybe the oil industry should pause for a little retro-reflection.
Marlan Downey will serve as co-chair for the forum “Winning the Oil End Game: The Future of Hydrocarbon Resources in Our Global Economy” on April 12 at the AAPG Annual Convention in Houston.
Downey, a past AAPG president, was a high-ranking executive for both Shell and Arco in an oil industry career that covered several decades.
“Remember those mirrored balls we used to have in discos 40 years ago?” he asked. “I think we’ll have a series of flashes and insights into what our hydrocarbon future is going to look like.”
Today the industry may be trapped in myopia, with too little hindsight to remember that oil prices cycle up and down, too little foresight to envision oil as a scarce commodity.
“The trouble with wisdom in the oil business is that the cycle time of management is probably on the order of six to eight years. That’s how long senior management is in place,” Downey said.
“Unfortunately, when we’ve had these real breaks in price, they’re likely to be more widely spaced than six to eight years,” he noted.
If the world is entering the end game in oil production, Downey sees that transition as more Gary Kasparov than Samuel Beckett.
“I think of ‘end game’ in the chess sense,” he said. “In the latter part of the chess game strategy changes, versus the opening strategy.”
The Group
Panel members and presentation topics for the forum include:
- Michael Bahorich, Apache Corp., “The Energy Supply Challenge: This Time Is It Real or Imaginary?”
- Amory Lovins, Rocky Mountain Institute, “Winning the Oil End Game.”
- Michael Ayling, MLA Resources, Tulsa.
- Andrew Latham, Wood Mackenzie, “Comparing Exploration Results Internationally.”
- Daniel Tearpock, Subsurface Consultants & Associates, “What Makes a Good Prospect?”
- Marlan Downey, “Do You Really Understand High Risk/High Reward Exploration?”
- James D. Robertson, Rannoch Petroleum, “Tips for Success in High-Risk Exploration: The Tangguh Experience.”
- Sandy Rushworth and Phil Stark, IHS Energy, “The Challenging Role for Giant Fields: Can We Expect Giant Fields to Meet Increasing Oil Demand Trends?”
If the session has an overarching theme, it might be that no one knows for sure where the future will lead the industry.
“There’s a very broad group of outcomes, or possibilities, or scenarios, as to what will happen in our energy future,” Downey noted.
“This session concentrates, not on ethanol from switchgrass,” he added, “but on what are the things that are likely to happen in the future in regard to hydrocarbons.”
Rushworth, global data adviser for IHS Energy in Houston, said she plans to address a puzzling problem facing petroleum exploration.
“The conclusion right now is that we have an exploration dilemma,” she said. “We are finding smaller fields despite better technology. And we’re finding more gas than liquids.”
What’s especially troubling is the industry’s failure to discover new giant oil fields, the traditional foundation of global crude production, Rushworth noted.
“In 2004-05, we have had the lowest liquids reserves found since World War II,” she said. “That’s created real anxiety. We’re doing very badly in terms of resources.”
By her estimate, world oil production since 1995 has totaled 236 billion barrels, while worldwide oil discoveries in the same period have totaled 145 billion barrels.
Throw in two hurricanes in the Gulf of Mexico that “really stressed out the oil and gas supply,” she said, and you have the makings of a public panic.
Hold That Curtain...
So we hear talk about the end of the Oil Age and an impending shortage of crude oil resources, with a quick peek at the Hubbert Peak.
But wait, Rushworth said.
Since 1995, oil reserve growth -- the upward revision of existing reserves caused by changes in economics, technology and recovery factors -- has totaled 450 billion barrels, she noted.
Instead of running out of oil, the industry seems to be running into it, and right where it’s always been.
“We would say all is not lost, because we’re not at peak oil,” Rushworth said.
In addition to reserve growth, “probably our biggest strength,” she sees global oil productive capacity growing to 108 million barrels a day by 2015.
Current actual world production of all hydrocarbon liquids is less than 85 million barrels per day.
And more oil is on the way.
“I’ve been looking at how long it takes for fields to come online in some of these harsh environments, like the deep offshore. It tends to average about seven years,” Rushworth said.
“This is one of the reasons we feel the world isn’t at peak oil -- there are these discoveries in deepwater that haven’t come online yet. These are huge fields, with more than 250 million barrels,” she added.
Instead of worrying that recent large discoveries in the Middle East have found natural gas instead of crude, Rushworth said “natural gas is great, especially in the Middle East, because they’re getting so good at liquefying that.”
And as for a largely absent producer, “Iraq is producing about a sixth of what people expected it to be producing now.
“Fewer than 10 exploration wells have been drilled in the past four years,” she noted.
High-Risk Exploration
It’s also possible that the exploration sector of the industry will change course and start doing something exciting and different:
Return to high-risk exploration.
Downey said he’s observed “that many people elected in the last number of years not to do any exploration in high-risk, high-reward areas, because they have been penalized so heavily by failure.
“And it’s easy to fail in high-risk exploration,” he added.
High-risk, high-return exploration, however, has been an essential safeguard for world oil production.
“I will be pointing out to people that you can’t be successful just by going after the gut-cinch prospects that give you the low-risk, modest rewards,” Downey said.
“You’ll have to also, for a successful hydrocarbon future, be willing to go after the larger-scale gambles,” he observed.
In his presentation, Downey said, he will “try to resolve four or five points about how those high-risk, high-reward things are quantitatively different -- and give the prescriptive of what simple things you have to do if you are going to find large amounts of hydrocarbons.”
For an added perspective, Downey recommended Robertson’s discussion of successful high-risk exploration.
“He’s going to emphasize that such discoveries require an unbroken chain of wise decisions,” Downey said. “If there’s a break in the chain -- if somebody doesn’t do his or her work properly -- such things never happen.”
Bigger Challenges
New oil discoveries won’t guarantee everyone a plentiful supply of crude. For future production, exploration risk might be one of the industry’s smallest worries.
“The bigger challenges are going to be the above-ground risks,” Rushworth said.
Politics represents the biggest threat for a global oil-supply disruption.
Political risk exists in any number of places around the world, most notably in the Middle East, Africa and Latin America, she noted.
Rushworth also sees the ascendancy of national oil companies (NOCs) as a threat to the role of international oil companies (IOCs).
NOCs typically have abundant capital, manpower and resources, no board of directors and a mission to secure oil supplies for their home markets, she said.
“One of the other key things we’re looking at is fiscal incentives -- we’re seeing a real tightening of fiscal terms,” Rushworth said. “The good news is, there are lots of fiscal incentives going on.”
Déjà Vu?
Soaring oil prices in 2005 renewed speculation about an end game in crude production. Are oil prices destined to stay above $50 a barrel forever?
“One of the most prestigious and respected groups, Cambridge Energy Associates, says that’s not so,” Downey said. “They see enough production coming on in about a year or so that we’ll see a price break.
“Whether oil will ever be down to $15 or $20 is a real question, but I’m sure they think once you get a barrel of oil more abundant than people want to buy, prices should come down,” he added.
Productive capacity and even current supply appear to have less effect on oil prices than the mood swings of futures traders, Downey said.
“What we’re seeing currently is how much of a fear factor we have in the price of oil. I saw the price of oil change $5 on the news that the Saudis had an unsuccessful attack on one of their terminals,” he said.
“That isn’t a supply-and-demand or a logical response,” he stated. “That’s a fear response.”
The short attention span of the oil markets probably contributes to the industry’s current near-sightedness.
In that case, a long memory provides the best cure.
“When I see everybody knowing something in the future, I bet the other way,” Downey stated.
“For those of us who’ve been in the business for more than 50 years it’s -- what’s that phrase? ‘Déjà vu all over again,’” he said.
Downey thinks “Winning the Oil End Game” will bring flashes of illumination into the future of worldwide hydrocarbon production.
At the same time, he doesn’t expect the forum panel to provide the definitive answer to securing oil supplies, or an unassailable picture of future events.
A crystal ball?
No.
A disco ball?
Well, maybe.
“I hope we will end up with a series of what I will call ‘glints,’” Downey said, “not from people who know what the future is going to be, in any sense, but with a broad diversity of viewpoints.”