"Depletion patterns show change due for production of conventional oil."

The following article is reprinted from the Oil & Gas Journal OGJ Special of Dec. 29, 1997 with permission of John C. Kennedy, editor, and features a forward by Roger Herrera, president of Achorage-based Northern Knowledge, an Alaska consultancy involved in oil & gas, environmental issues and energy politics. Emphasis added. Ed.

It was particularly interesting to read an article in the Oil and Gas Journal by geologist Colin Campbell. His article grasped the nettle of predicting future production of world-wide oil and when it might start to decline.

Campbell believes that the easy, conventional off, which we have been happily using for the past 140 years, will start to decline in the next year or two. That in itself is no big deal because the five Arab producing countries around the Persian Gulf will retain the ability to meet supply by increasing their production from huge remaining reserves. However, by controlling the supply of world oil they will also be controlling its price.

The rise in price will then kick in what Campbell calls non-conventional oil, which will be quite sufficient to fulfill world demand for another decade or so. After that, the "oil era" will begin to phase out.

Campbell's conclusions are not quite unique. In fact they are closely duplicated by another recent scientific paper written by Richard Startzman and A. S. Al-Jarri of Texas A and M, which was delivered at the Society of Petroleum Engineers conference in October, 1997. Those authors give us a few more years of leeway before the inevitable happens, but they are not starry eyed optimists for our long term oil future.

I find Campbell's article very compelling if only because he and I shared a tent in the jungles of Papua, New Guinea on and off for a couple of years while we looked for oil among the leeches, snakes and stone age civilization of that island some 30 years ago. He has a doctorate in geology from Oxford University and has worked in many parts of the world for major and smaller oil companies. Above all, he is a towering intellect whose work cannot, in my opinion, be dismissed as eccentric or academic.

As an Alaskan, I have to ponder on the impact to our state if Campbell is correct. Our production is obviously in decline, but we have the future promise of North Slope natural gas, the bounty of which may lie beneath the coastal plain of ANWR and NPR-A, the numerous satellite fields around Prodhoe Bay and Kuparuk, and, the hope for "No decline after '99." It all sounds rather comforting, but is it?

The one thing that we can rely on is that the present circumstances of the El Nino winter and the Asian economic upheaval are temporary aberrations. We also know that the Clinton administration is temporary-at least in its impact on energy policy. Consequently, the Campbell thesis that the price of oil will rise in the next few years is unlikely to be materially delayed by world economics or U.S. politics. It remains inevitable that the Asian countries will demand more and more of the world's oil, especially from the Middle East. The United States will continue to be comfortable importing increasing amounts of Venezuelan crude and oil from Mexico and Canada, and is unlikely to embrace energy conservation until we are facing a situation much more frightening than President Jimmy Carter's "moral equivalence of war."

It is interesting that Venezuela, which is undergoing something of an oil renaissance since it de-nationalized its oil industry, is the biggest cheater on OPEC production quotas, but is the first OPEC country to suggest curtailing the cartel's crude output in order to push upwards the present price of oil. If Venezuela succeeds in this effort, even as a short term fix, it will reconfirm OPEC's ability to control the price of oil, for the first time since 1979. It will also illustrate the lack of influence the United States has on the oil market despite its gun boat diplomacy in the Middle East and the fact that we now import only modest amounts of crude from that region.

All of these circumstances strongly suggest that Alaska is more likely to profit from the oil outlook in the near future than not. However, we cannot rely on the federal government to make sensible decisions to help us develop future energy resources. On the other hand, we cannot sit back and hope that Campbell's forecast is correct, or that OPEC increases the price of oil. Our Arctic oil and gas takes too long to develop for us to wait for external events to trigger the opening of ANWR or the building of the gas pipeline. We must be proactive.

As citizens, we are amazingly mute considering our total embrace of the Permanent Fund dividend checks and the poll figures showing very high support for responsible oil development. Our influence on federal oil decisions is minuscule compared to that of the anti-developers. Our support for ANWR is hot or cold depending on the political mood of the moment. Considering how important it may be in our future, we should be fighting for it incessantly. Even NPR-A, which is a petroleum reserve, received only cool public support during the hearing process.

Colin Campbell's forecast for world oil decline might not turn out to be right, in which case Alaska's future will be rosy for reasons quite outside our control. If, on the other hand, he is wrong, as past history of such forecasts would suggest, we can look forward to some hard times. A prudent person or state government should prepare for the worst and hope for the best. Forcing the federal government to allow careful development of lands with good oil potential in our state is one reasonable preparation we should all embrace. Roger Herrera, Anchorage.

Last summer, the industry, led surprisingly by the Chinese, bid large sums for the right to reenter oil fields in Venezuela under tough terms. The year also saw the leasing of deepwater tracts in the Atlantic off Europe. Brazil, too, had a good response to its offer to open its deepwater shelf, much in water depths of more than 6,000 ft.

Does it mean that there are some nuggets left out there? Or does it rather mean that there are not easier places left to explore?

At any rate, it suggests that there is little left to find in China, where demand is growing fast.

Economists tend to say that oil resources are infinitely large and that there is no possibility of absolute shortage-only shortage at a price. In a certain sense, they are right: homo sapiens won't ever find the last thimblefull of oil hidden out there somewhere; besides, there are huge amounts of heavy oil and bitumen to go at.

But this is not the stuff that has fueled economic growth and prosperity for the past 150 years and provided much of the energy that allowed the world's population to expand six-fold over the same period. That was mainly light oil above 20 degree API, which flowed naturally from the reservoir into the wellbore. About 70% of it occurs in 300+ giant oil fields (larger than 500 million bbl), whose discovery peaked in the 1960s. It was relatively easy and cheap to both find and produce, and it flowed at a high rate. It is commonly called conventional oil and has a characteristic depletion pattern, starting at zero, rising to a peak or managed plateau, before declining exponentially to zero when it is exhausted.

The family of hydrocarbons is a large one, and each member has its own and very different characteristics and depletion profile. Some heavy oil and bitumen is already in production. Some deeper-water oil is coming in, having stretched technological skills to the limit. Some polar regions are in production. And some enhanced recovery procedures are already in place.

Collectively these other types are sometimes called nonconventional oils, and generally they are difficult, expensive, and very low to produce.

Oil discontinuity

History is full of discontinuities, when periods of tranquility and steady growth were overturned by sudden changes. Empires, built over hundreds of years fell in sudden war and invasion. After a century of growth, the builders of steam locomotives found themselves eclipsed by the diesel engine. The fish canning industry in Norway was mined by the advent of the domestic refrigerator.

So the proposition that the world is about to experience the end of the cheap abundant supply of oil, which has created what has been called Hydrocarbon Man, should come as no surprise: It is a pattern well-founded in history. Things change - and suddenly.

Such a fundamental oil discontinuity will likely arise from two factors: first, the physical peak of production at about mid-point of depletion, which is driven by the physics of the reservoir; and second, the control of the market around peak by a few richly endowed countries.

Oil is unevenly distributed because it was formed only very rarely in time or place in the Earth's long geological history.

What oil will peak? Clearly, the relatively easy conventional stuff. It has been responsible for almost all oil produced to date and will dominate supply for the next few decades until long after peak production. Increasing amounts of other types will gradually be brought into production to soften the landing at the end of conventional depletion, but they will have a negligible impact on peak itself.

The world has been very extensively explored with the help of sophisticated technology and great advances in petroleum geology. It is accordingly almost inconceivable that any large provinces that is to say, with a potential sufficient to supply the world for more than, say, a year or two - have been missed. It means the most of the future supply will have to come from known basins, most of which are very well known.

Various robust statistical techniques can be used to extrapolate such past discovery to predict the size and number of fields yet to find. They include the creaming curve, which plots cumulative discovery against cumulative wildcats or over time; the parabolic fractal, which evaluates size distributions; and the bell curve and the multiple bell curve, which model production and discovery patterns. You have to find oil before you can produce it.

Naturally, such studies depend on valid data. It is extraordinary that an industry which prides itself on its science and technology is content to operate in such a medieval manner when it comes to defining and reporting its reserves. What we need to know are P50 (probability 50%) reserves, for which the risks that the estimates will be above or below actual production are evenly matched.

As it is, some companies initially report P90 numbers, giving the illusion of later reserves growth. And some countries report P10 numbers partly for political reasons. In 1996, 46 countries reported unchanged numbers, which is clearly implausible.

Depletion models

Theoretical and empirical evidence shows that peak production in any country more or less coincides with the midpoint of depletion, save where production is artificially restrained, as for example by OPEC quota. A depletion model can therefore be built on three groups of countries:

1. Postmidpoint countries, where production is set to decline at approximately the current depletion rate (which in fact is normally close to the midpoint depletion rate).

2. Premidpoint countries, where production is yet to peak.

3. Swing countries: a group of richly endowed countries that are at an early stage of depletion.

Fig. 1, built on end-1996 data, plots the depletion profiles of representative postmidpoint countries. Ideally, they should show total discovery, but here we will have to be content with published giant field reserves shown as bars. They show a characteristic time lag between peak discovery and peak production. The amount produced at depletion midpoint (half the ultimate) and the date when it is reached are noted.

Given the atrociously weak database, no one should expect great accuracy. The aim is to identify the climate, not the weather.

Many claims are made for the impact of technology, but it is well to remember that the main result, if not the objective, of the remarkable technological achievements, of which the industry can be justly proud, is to extend plateau production, which makes economic sense.

In some cases, these efforts may indeed defer peak beyond depletion midpoint, but at a cost - the subsequent decline will become a cliff, making a delayed crisis even more severe.

Other claims are made for "reserve growth," but in reality most revisions simply reflect the shift from P90 to P50 numbers as the field's size can be assessed with greater confidence as it approaches exhaustion. Such revisions should of course be back-dated to the discovery of the field containing them, because nothing was actually added.

Still other claims are made about improving recovery. It is said that recovery was previously 30% but now is up to 50%, thanks to technology.

This doesn't bear close analysis either. In earlier years, few fields had been abandoned, and no one knew what percentage would be recoverable: the 30% was little more than a pragmatic inventory number. The very concept of a recovery factor in fact is useful only in the early stages of development; later, recovery itself is calculated from well decline curves and material balance studies. Many apparent increases in recovery factor simply mean that the oil-inplace estimate is also due for upward revision.

Postmidpoint countries

The post-midpoint countries are the easier ones to model, as they show a consistent exponential decline over many years which may be extrapolated with confidence. Drilling rate has in most cases steadily declined as fewer and fewer prospects remain to test.

Extrapolating the trend commonly puts an endpoint to exploration drilling within a decade or so. The discovery plot is now almost flat at the tail end of its hyperbola: only small fields being found either now or in the future. Most small fields were found in the course of looking for larger ones. So, in practice exploration will likely end before all of them have been found.

How many wildcats are drilled today around Titusville, Penn., where production peaked last century? Things do grind to a stop.

Good examples are Austria, Germany, the U.S., Canada, Argentina, Trinidad, Venezuela, Egypt, Indonesia, and Australia [ILLUSTRATION FOR FIGURE 1 OMITTED]. In some cases, the depletion is essentially unfettered and follows a natural curve, reflecting the discovery curve before it. In other cases, the opening of the offshore or the constraints of OPEC quota or underinvestment may intervene.

In the countries with the smaller and more concentrated endowment, such as Germany or Austria, peak comes before depletion midpoint, whereas those with a large population of fields, such as the U.S., tend to have more symmetrical profiles.

The shoulders on the U.S. profile incidentally reflect proration and the late discovery of Alaskan oil, which nudges the nonconventional. There may be another late blip on the tail for the deep offshore.

Trinidad's profile reflects an early onshore phase, followed by two offshore campaigns, all of which are now mature.

Venezuela is a special case, with the saddle of the 1980s representing OPEC quota and perhaps underinvestment. Now, production is rising to a second peak, built largely on what would naturally have been produced during the saddle. It may well rise above what the model shows, in which case the subsequent decline will be steeper. With most of the country's oil found before 1930, it does not seem likely that current readmission of the international companies will lead to any radical change in the conventional resource base. Much of Venezuela's reported reserves is heavy oil that should be treated as nonconventional, having the corresponding depletion profile.

The late postmidpoint peak of Canada's profile is surprising for a mature country.

Australia's curve, with its rather steep imminent decline, may be distorted by the inclusion of large amounts of NGL from the North West Shelf gas fields.

Although the long term model is robust enough, there are always anomalies around the inflection point, not least from the gross weakness of the public database.

Premidpoint countries

Many countries, and especially those with a second offshore lease on life which opened during the 1970s, are now approaching their midpoints. Production accordingly is set to rise for a few more years.

The model either extrapolates the past trend or uses a default of a 5% annual increase. The assumptions could be improved with short term actual forecasts where known, but since they apply only for a few years it is not a critical factor.

One of the more important is the former Soviet Union (FSU). Its reserves are here assessed at 98 billion bbl; published reports range from 57 billion bbl to 190 billion bbl. Peak discovery was followed by peak production. Then came the post-Communist collapse but the prospect of a second subsidiary peak around 2010 for Caspian production. It could be higher.

China is a very thoroughly explored country, expected to peak around 2000. Its reserve data are, however, suspect, the reports having been unchanged for many years at 24 billion bbl. There seems little scope for reserve revision as many of the fields are produced on a close spacing.

Mexico and Columbia will peak in a year or two, the former's reserve reports being suspect. Norway and the U.K., where the resources have been depleted at high rates following the early discovery of giant fields, are also close to peak production. If efforts to extend plateau production are successful, their already steep declines will be even steeper. Norway is a major exporter, and its decline will have a major impact on the swing production discussed below.

Algeria, Libya, and Nigeria all demonstrate a production saddle related to OPEC quota and are likely to reach the second peak around 2000.

India, Malaysia, Syria, and Oman are other examples of countries about to peak.

Swing producers

The model assumes that five Middle East countries-Abu Dhabi, Iran, Iraq, Kuwait, and Saudi Arabia (including the Neutral Zone) - act as swing producers making up the difference between world demand under alternative scenarios and what the other countries can produce. How they exert their swing control will largely determine the price of oil.

Together, they own about half the world's yet-to-produce volume of conventional oil. Here, it is assumed that they will impose radical price increases when they supply more than 30% of the world's demand, leading to a plateau of production until their share reaches 50%. By then, they will be close to their midpoint of depletion, and world production will have to decline at the then depletion rate of about 3.3%.

How to allocate the swing production to the member countries is a second issue. Here, it is assumed that Iraq will be in full production by 2000 and that from then onwards each swing country's production will equate to its share of the aggregate swing yet-to-produce until it reaches its midpoint. Saudi Arabia then picks up the balance.

The model therefore suggests that the world faces a two-stage oil crisis. The first will come when the swing share reaches a level to impose much higher prices, which is expected to happen before 2000. That should curb further demand. But 10 years later will come the second stage, when physical shortages begin to appear. By about 2015, the Middle East swing producers themselves will be past midpoint and into permanent decline).

The depletion profile of the nonswing countries, as modeled, comes very close to the theoretical bell curve because production was relatively unfettered, being free of OPEC quota.

Gas, unconventional oil

After the all age will come the gas age. Gas is more abundant in nature than is oil, but it also needs much better seals - salt or permafrost - to hold it in the reservoir.

The ultimate endowment is just short of 10,000 tcf, and production is likely to peak around 2020 at 120 tcf/year. In terms of oil equivalent on a current value basis, this amounts to 1 trillion bbl of oil equivalent (boe), compared with 1.8 trillion boe for conventional oil.

Heavy oil and bitumen production, mainly from Canada and Venezuela, will no doubt rise in the future. More deepwater oil and gas (greater than 500 m water depth) will come in. Perhaps there will be some contributions from new finds in the Arctic, and enhanced recovery may help out.

Furthermore, nonconventional gas, especially coalbed methane, will be important in North America and perhaps Europe, China, and Australia.

Are these numbers wrong? Yes, of course they are, given the atrocious state of the database, but they are not that wrong. With the 1997 reserve numbers released this issue, we can begin to fine-tune the model.

The message they convey is sufficiently serious for the issue to be addressed with some urgency, given the long lead time to develop alternative energy and find ways to use less.

It is not a Doomsday message: quite the contrary, because a more sustainable world may be a better place in which to live. The difficulty is the transition.

The Author

C.J. Campbell holds a Ph.D. in geology from Oxford University. He began work in the oil industry in 1958 as an exploration geologist in Latin America and Australia, working first for Texaco and later British Petroleum. In 1967 he joined Amoco in New York as a regional new ventures geologist, then became general manager for Shenandoah Oil Corp. in London in 1372 in a joint venture with Saga Petroleum. He was named exploration manager for Amoco in 1980 and executive vice president for Fina in 1385, both in Norway.

In recent years, Campbell has been a consultant to industry and governments, specializing in oil resource assessments. He is an associate consultant with Petroconsultants and author of a book, The Coming Oil Crisis, published this year by Multi-Science Publishing Co., England, and Petroconsultants, Geneva.