Peak Oil Review

Vol. 3 No. 51
December 22, 2008
Tom Whipple, Editor
Steve Andrews, Publisher

1. Prices and production

Crude prices started the week with the January contract touching $49 on Monday on prospects for
an OPEC production cut and closed out the week trading as low as $32 a barrel due to a shortage
of storage space for the expiring contracts. Oil prices were rather confused last week as the futures
market is in “contango” with later months trading for higher and higher prices. Oil for delivery 5
years from now and beyond, for example, is trading up in the $70 range.
For days prior to OPEC’s meeting in Oran on Wednesday, numerous spokesmen emphasized that
a “surprisingly sizeable” cut would be made. Moscow even chimed in by talking about a production
cut of up to 300,000 b/d. When the actual OPEC cut of 2.2 million b/d was announced and with no
new cuts from Russia for now, the oil markets were underwhelmed. Oil prices fell for three days,
finally stabilizing on Friday after the January contract expired.
OPEC is now aiming to cut production by 4.2 million b/d from September’s production total of 29.0
million b/d. Only 900,000 b/d of this cut is scheduled to come from Venezuela and Iran, the two
countries in the most desperate economic straits and the most likely to evade their quotas. This is
still a sizeable cut even if only the Gulf Arab states adhere strictly to their targets. Venezuela,
however, has already announced a production cut of 189,000 b/d. This is a good start on its cut-
quota of 350,000 b/d and an indication that more of a cut may actually be made this time.
The oil markets still appear seized with the idea that the worldwide demand for oil continues to
drop rapidly. Traders cite the buildup in US and OECD crude inventories and note that the major oil
companies are planning to store 50 million barrels onboard supertankers due to excess production
and the lack of conventional storage space.
While US consumption is down by about a million b/d and demand in China and Japan is down
too, there are signs that the decline could be stabilizing due to the relatively low product prices.
China has just made cuts of 14 and 18 percent in the price of gasoline and diesel fuel respectively,
which will stimulate demand. The hundreds of poorer countries and small islands that were in
desperate situations last summer with oil at $140 a barrel should now be able to afford oil again.
The latest official production estimates and forecasts from the IEA say that worldwide demand for
oil in 2008 will shrink, but only by 200,000 b/d. The Agency now projects that the “call on OPEC”
for 2009 will only be about 800,000 b/d below 2008. There are obviously major discrepancies
among the market pricing of oil, the 4 million b/d production cuts planned by OPEC, and IEA
forecasts for demand next year.
2. OPEC may meet in January
After touting for weeks the “sizeable” production cuts that would drive oil prices back to appropriate
levels, OPEC officials were obviously disappointed by the immediate results of the Oran meeting.
With the February oil futures contract trading as high as $54 just before the meeting and closing
the week at $42.36, the announcement clearly did not deliver the desired results.
Officials strived to put a good face on the market responses, reiterating that a 2.2 million barrel cut
was enough to balance the market and that it will be necessary to wait until January 1st , when the
cuts become effective to see results from actions taken. OPEC’s Secretary General El-Badari
indicated that the cartel had about 60 percent compliance with the October 1.5 million b/d cut
during November.
On Friday, OPEC’s President Chakib Khelil told reporters at an energy conference in London that
the cartel will continue to cut production as much as necessary to stabilize prices. Khelil indicated
that OPEC still believes the demand for oil will continue to fall and that the group may meet in
Kuwait on January 19th to discuss further production cuts.
3. Investment
Alarms continued to sound around the world last week bemoaning the sudden drop in oil
exploration and production. Active drilling rigs in the US have fallen to 1,790 - down 12 percent
from September. Industry analysts expect that hundreds more rigs will be idled by summer and that
there could be a total drop of as many as 1000 rigs or a 50 percent decline during 2009 from the
September 2008 peak.
In Alberta, Connacher Oil and Gas announced that it was cutting production from its oil sands
project nearly in half because current prices for bitumen could not cover the costs of existing
production. Other oil sands producers are expected to follow if prices do not revive. Shell, however,
expressed the hope that production and engineering costs for oil sands projects will drop soon and
that it is waiting for the opportune time to revive new projects that were put on hold last month.
At the LNG summit in Barcelona, speakers grappled with the issue of whether very expensive
investments in LNG terminals continue to make sense in face of the economic downturn. There will
be a 50 percent growth in world LNG production capacity during the next three years, but after that
there could be a supply crunch as investment is scaled back.
Saudi Oil Minister Naimi warned on Friday that plunging crude prices coupled with the world’s
financial problems will harm the long term health of the industry. "Today's price levels are wreaking
havoc on the industry and threatening current and planned investments," Naimi told the London
conference of producers and consumers that was a follow-up to the one held in Jeddah during the
height of the oil price spike last summer. The oil industry’s change in focus over the last six months
is striking.
4. The IEA sets a date
In the IEA’s annual report, “The World Energy Outlook 2008”, the agency says that "although
global oil production in total is not expected to peak before 2030, production of conventional oil...is
projected to level off towards the end of the projection period." This rather cryptic formulation,
which sounds a lot like a compromise between factions in the IEA, says that at some date between
now and 2030 world oil production will peak, but not to worry because the difference will be made
up by increasing production of natural gas liquids, ethanol, and heavy oil.

When Fatih Birol, the IEA’s chief economist, was interviewed by the Guardian newspaper last week
he was pressed to explain just what “level off towards the end of the projection period” actually
means. To the astonishment of the interviewer, the answer came back as 2020 - only 11 years
from now. For an Agency that has steadfastly maintained that there was plenty of oil to keep on
increasing production for the foreseeable future, this admission caps the turnaround that came with
the publication of this year’s Energy Outlook. In that publication, the agency says new research
shows that oil production from the world’s existing oil fields may be declining at 6.7 percent a year
rather than the 3.7 percent rate previously estimated.

The impact of this admission on government policy has yet to been seen. Many believe that a 2020
date for the plateauing of world oil production is far too optimistic and that a more realistic time
frame is between 2010 and 2013 if it has not come already due to the economic slowdown. The
next shoe to fall in the general recognition of imminent peak oil may be at the US’s EIA which will
be changing leadership in about a month.
5. Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
UUU

• Delays in energy investments could curb future global fuel supplies by the equivalent of 4
million b/d within the next five years, according to Peter Jackson, Cambridge Energy
Research Associates. As scores of small wells are shut down, analysts have calculated that
oil production in North America could decline by 1.3 million barrels a day through 2010, or
17 percent, to 6.14 million barrels a day. (12/16, #6)
• Oppenheimer & Co. senior oil analyst Fadel Gheit estimates world oil supply is likely to
drop by three million to five million barrels a day in 2009, due to OPEC cuts and smaller
companies slashing production, compared with a decline of just one million to two million
barrels a day in global oil demand. This scenario of overtightening supply relative to
demand would reduce global oil inventories a record 10% to 30%, pushing crude prices
significantly higher later in 2009, Mr. Gheit said.(12/15, #4)
• Oil companies have begun cutting spending nearly across the board. A survey by Barclays
Capital found 2009 capital budgets were 12% lower than 2008 spending plans, and some
believe they might head lower. Budgets in the U.S. and Canada are being cut the most, as
projects in the high-cost oil-sands and unconventional natural-gas fields now make less
economic sense. (12/20, #7)
• Russia would come under crippling financial pressure and may need to raise money
abroad if oil stays at an average of $30 a barrel over the next two years, the World Bank
predicted Friday. The bleak scenario would mark a rapid unraveling of Russia's oil-fueled
economic gains over the past eight years. (12/20, #13)
• Because Russia’s oil output is falling due to underinvestment, Russia already is, in effect,
helping OPEC without actually turning off any taps. Any reduction from Russia, depending
on the size, could simply be repackaging naturally declining output as a "cut." (12/15, #4)
• A survey of 200 oil and gas companies shows the oil price required to allow new oil
projects to break even has climbed from about $18 US per barrel in 1999 to $60 in 2007
and an estimated $62 now…In addition to jeopardizing future conventional oil projects, oil at
$45/barrel makes new tar sands production uneconomic, has the same effect on biofuels,
and discourages development of more fuel efficient vehicles. (12/20, #14)
• Iran's oil minister said he considered the "real price" for a barrel of crude should be more
than $100. Saudi Arabia has said $75 a barrel was a fair price, comments echoed by an
Iranian official this month. Other OPEC officials have said OPEC states needed $70 to $80
a barrel. (12/15, #9)
• Last week Iran’s President Ahmadinejad acknowledged for the first time that due to low
oil prices the Government will have to cut spending and subsidies for food and fuel, as well
as raise taxes. (12/20, #10)
• Toyota could report its first annual operating loss in 71 years and may issue a profit
warning at a scheduled year-end news conference on Monday. (12/19, #9)
• BP today announced that it has successfully started production from the third and fourth
wells at the Thunder Horse field with production now in excess of 200,000 barrels of oil
equivalent per day. BP plans to start up additional production from the Thunder Horse North
field in the first half of 2009. (12/19, #13)
• John Holdren, currently a Harvard University physicist, has been selected as President-
elect’s Science Advisor. Holdren has said recently that the world is not running out of
energy and that even "peak oil" is debatable. (12/19, #14)
• A coalition of 14 companies announced the creation of a new business alliance aimed at
promoting domestic production of lithium ion batteries. Automakers hope to use the
batteries in next-generation hybrids as well as plug-in electric cars. (12/19, #16)
 • Recent analysis by the EIA projects virtually no growth in US petroleum use through the
year 2030 because of wider use of ethanol and biodiesel and a push toward greater
automobile fuel efficiency. The reversal began this year with US petroleum use declining by
a million barrels a day compared with 2007. (12/18, #4)
• Nepal’s government declared a national power emergency and said consumers will face
electricity cuts of as much as 16 hours a day. (12/18, #8)
• Facing poor returns for producing gasoline, Valero Energy Corp. reduced gasoline
production at 10 U.S. refineries. (12/18, #10)
• Gazprom said it would cut Ukraine off from gas supplies starting in January as Kiev could
only pay $800 million in gas arrears before the end of the year. (12/18, #12)
• Speaking in 2004, incoming Energy Secretary Chu said he expected world oil supplies to
plateau within ten to forty years. The International Energy Agency, the voice of the global
energy establishment, announced last week that it expects peak oil to arrive by 2020, while
outside analysts believe it will come much sooner, if it hasn't already arrived. (12/18, #14)
• The United States will not be able to meet the mandate to use 36 billion gallons of biofuels
by 2022, reported the U.S. Energy Information Administration Wednesday. (12/18, #15)
• International oil companies operating in Nigeria said that if cases of insecurity should
continue in the oil and gas producing zones, they may be forced to stop the production and
supply of gas. (12/17, #9)
• Expanding its output of lower-emission fuel, Exxon Mobil Corp. said it would spend more
than $1 billion to increase diesel production at two US refineries and a third in Belgium.
Exxon sees a growing market for diesel, which provides better fuel economy than gasoline
and therefore emits less carbon dioxide for each mile driven. (12/17, #13)
• A national energy council should be established in the US to develop a 50-year energy
strategy, with the council developing benchmarks to monitor progress and making regular
public reports, said energy economist Joseph Stanislaw. (123/17, #14)
• Average global total liquid fuels production in 2007 was 85.41 million b/d according to the
IEA. In 2008, an average of 86.73 million b/d has been produced from January to
November, an increase of 1.5% over 2007. (12/17, #16)
• Venezuela’s PdVSA, which has served as the sole engine of growth for Venezuela's
economy, now faces one of its biggest challenges since President Hugo Chavez took office:
keeping up production with less money and funding the spending of a bloated government.
(12/16, #11)
• Some Chinese economists think the November statistics show their economy may have
bottomed under the influence of the global financial crisis, and that the fourth quarter of this
year and first two quarters of next year may see low economic growth, with a rebound for
the economy from the third quarter of 2009. (12/16, #13)
• Proved reserve reductions: Many companies will likely be forced to declare that big
chunks of their oil and gas reserves are uneconomic at today’s low oil prices. Smaller
companies that rely on their reserves as collateral on their credit lines from banks could find
their available credit shrinking along with the value of their booked reserves. (12/16, #8)
Quote of the Week
• “I find little reason for optimism regarding the market's ability to provide a coherent oil price
signal reflecting future scarcity of this precious non-renewable resource.” (12/20, #14)
-- Dave Cohen, energy writer
Commentary: Will Canada be Our Salvation?
By Roger Blanchard
(Note: Commentaries do not necessarily represent ASPO-USA’s positions; they are personal statements and
observations by informed commentators)

There have been occasional claims from U.S. media sources that oil from Canada, specifically oil
from the Athabasca oil sands region, can be the salvation for US oil woes in the future, assuming
drilling everywhere in the US doesn’t do the trick. An example of such optimism was exemplified in
a 60 Minutes segment about a year ago which gave the impression that the Athabascan region
could supply much of the future U.S. oil needs.
There is a considerable volume of oil in the Athabasca region and production has been increasing
over the years. But how realistic is it to assume that oil sands oil will provide a significant portion of
future U.S. oil needs?
In the 5-year period from 2002 through 2007, oil sands oil production increased from 660,000 b/d
to 1,184,000 b/d, an average increase of about 105,000 b/d per year, but the increase from 2006 to
2007 was only 58,000 b/d. Canadian oil production through September 2008 is down about
50,000 b/d relative to the 2007 average, suggesting that there has been little or no increase in oil
sands oil production in 2008. The 2002 to 2008 period has been a period of intense oil
development in the Athabasca region.
In 2005, the U.S. Department of Energy/Energy Information Administration (US DOE/EIA) stated
the following in their International Energy Outlook 2005 (IEO2005):
“Canada’s conventional oil output is expected to contract steadily, by about 600,000 barrels per
day over the next 20 years, but an additional 3.5 million barrels per day of nonconventional
output from oil sands projects is expected to be added.”
The US DOE/EIA projected that Canada’s conventional oil production will decline on average by
30,000 b/d per year and that oil sands oil production will increase on average by 175,000 b/d per
year over the next 20 years. That means Canada’s total oil production would increase by 2.9
million b/d over the timeframe to 5.3 million b/d in 2025.
How has Canadian oil production actually done since 2005? Through September 2008, Canada’s
oil production averaged 2.57 mb/d in 2008 compared to 2.37 mb/d in 2005 for an increase of
200,000 b/d. Based upon the US DOE/EIA forecast it should have risen approximately 435,000
b/d since 2005. As stated previously, Canada’s oil production is actually down approximately
50,000 b/d in 2008 relative to the 2007 average.
In the later half of 2008, numerous oil sands projects have been delayed or cancelled due to the
decline in the price of oil since July 2008. That doesn’t bode well for a significant increase in oil
sands oil production in 2009-2010 and possibly beyond.
With all the talk about oil production from the oil sands region of Canada, it’s often overlooked that
in recent years, Atlantic Canada has become a significant oil producing region. If it had not been
for a large production increase from Atlantic Canada in 2007 relative to 2006, Canada’s oil
production in 2007 would have declined despite extensive oil sands developments.
Oil production from Atlantic Canada comes from 3 fields: Hibernia-Avalon, Terra Nova and White
Rose. Table 1 provides data for these fields.

Table 1
Field On-Line Maximum 2008 Estimated Cumulative % of Oil
Date Production Production Ultimate Production Produced
Rate (b/d) Rate* (b/d) Recovery (Mb)*
(year) (Mb)
Hibernia- 1997 204,264 138,707 884 617.7 69.9
Avalon (2004)
Terra 2002 133,796 103,830 370-470 251.4 53.5-67.9
Nova (2003)
White 2005 117,300 100,377 200-250 107.9 43.2-54.0
Rose (2007)
*Through October 2008
In 2007, Atlantic Canada’s oil production increased by nearly 65,000 b/d relative to 2006. That
increase was related to the Terra Nova field being out of commission for 5 months in 2006 and
because there was a large increase in production from the White Rose field in 2007.
Other than a few minor fields, there is not much left in Atlantic Canada to tap into. Clearly Atlantic
Canada is in decline. Peak production occurred in 2007 at 368,437 b/d. Through October 2008,
production has averaged 342,913 b/d in 2008, down 25,524 b/d. Hibernia-Avalon and Terra Nova
are definitely in decline and it appears that White Rose has also entered decline.
Beyond Atlantic Canada, most of the remaining conventional oil production in Canada comes from
Alberta and Saskatchewan. Alberta’s conventional oil production has now declined to about 1/3rd
of its maximum production rate of 1.417 mb/d, which occurred in 1976. Saskatchewan’s oil
production has been relatively flat and around its maximum production rate of 420,000-430,000 b/d
in the last 5 years.
Table 2 provides data to assess how Canadian oil production is doing outside of the oil sands
region and Atlantic Canada.
Table 2
Year Total Oil Sands Oil Atlantic Total – Oil
Canadian Oil* Production Canada Oil Sands –
Production (mb/d) Production Atlantic
(mb/d) (mb/d) Canada (mb/d)
2002 2.171 0.660 0.286 1.225
2007 2.616 1.184 0.368 1.064
* Total oil = conventional crude oil, lease condensate, and oil from the tar sands
Based upon Table 2, Canadian oil production outside of the oil sands region and Atlantic Canada
has declined at a rate of about 2.7%/year over the 2002-2007 period. Atlantic Canada’s oil
production is down 6.9% in 2008 relative to 2007 as the region has entered long-term decline.
If Canadian oil production outside of the oil sands region plus Atlantic Canada continues to decline
at 2.7%/year and Atlantic Canada’s production declines at 6.9%/year through 2025, the total
decline from 2007 to 2025 would be ~679,000 b/d, a bit more than what the US DOE/EIA predicted
for the 2005 to 2025 period.
To increase Canadian oil production to 5.3 mb/d in 2025, as the US DOE/EIA was projecting in
2005, oil sands oil production would have to increase to around 4.55 mb/d. Although the industry
talks about producing 5 mb/d of oil from oil sands in the future, the difficulties of the last few years
at increasing production should make it clear that the probability of that production level is pretty
low.
I personally believe the industry will be lucky to reach a maximum of 3 million b/d from the oil
sands. Scaling up oil production from oil sands involves major challenges that many people prefer
to ignore. If the 3 million b/d level was reached in 2025, Canada would be producing less than 4
million b/d and would not be able to export dramatically more than it does today. The bottom line
is that the U.S. should not expect Canadian oil to provide a salvation to U.S. oil woes in the future.
Roger Blanchard teaches chemistry at Lake Superior State University and authored book “The Future of
Global Oil Production: Facts, Figures, Trends and Projections by Region”, McFarland & Company.