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BP's "giant" and Peak Oil

By chutay | 09/16/2009 | 11:40 AM

Last blog, the focus was the New York Times Op-Ed by MIT Economist Michael Lynch, "Peak Oil is a Waste of Energy". On September 2, the day this blog appeared, British Petroleum (BP) announced a “giant” oil discovery in the Gulf of Mexico. The discovery inspired several articles like this one in the Guardian, “Giant oil find by BP reopens debate about oil supplies.”

Now my intention is not to take on the press every week, but when surrounded by a target rich environment one must shoot. My experience is that for the most part the conventional media sticks with the conventional views and avoids the serious, rigorous, non-agenda based analysis found primarily on the internet e.g. The Oil Drum.

Lynch’s article confidently predicts “…the price will likely come down closer to the historical level of $30 a barrel…”  He sounds the all clear on Peak Oil and BP’s find, “…reopens debate about oil supplies”.

Just as the press missed the “it's-all-contained” financial meltdown, they are missing the story on oil depletion. Otherwise you would have heard about the ignored 2005 Department of Energy Report "Peaking of World Oil Production: Impacts, Mitigation and Risk Management," by Robert L. Hirsch known as the Hirsch Report. You should read it.

I am not of the end-of–civilization or die-off ilk. But we are on the clock. When oil production goes into permanent decline, it will be a defining issue for humanity.

My intention for this blog is to present the data, attempt to clarify confusion and offer constructive strategies and tactics in the hope more decision-makers recognize the problem and elevate it to the highest levels of their organizations so serious actions can begin.

Oil by its nature is an unusual resource. It is non-renewable, produced in only two geological periods in a few unique places – most long since explored- where seven very specific geological conditions must be present. It must be found, brought to the surface, refined and moved before used.

It has the highest energy density of any portable energy storage medium making it the perfect fuel for 95% of the world’s transportation and especially important for supply chains now mostly dependant on cheap and abundant oil.

Transitioning from conventional oil sources to unconventional sources — heavy oil, oil sands, oil shale, coal to liquids, biofuels, natural gas etc., takes time, money, work and wisdom. There are no quick fix alternatives to replace oil for transportation.

There are alternative sources of energy, but they will not magically appear. Peak Oil is a liquid fuels problem — not energy in general e.g. electricity does not help without massive, slow and expensive replacement of transportation fleets with battery-operated vehicles.

My hypothesis has been, and remains, that Peak Oil is coming and presents great danger to the United States and the global economy. Forecasts range from 2005 to 2050 — clustering near 2012. The Hirsch Report posits that to avoid severe worldwide pain rapid large-scale mitigation efforts must begin 20 years before peaking.

So what does BP’s giant oil find in the Gulf of Mexico tell us about “the debate on oil supplies” and the peaking of world oil?

The BP Tiber discovery is good news for BP and is tangible evidence that technology for extracting oil is improving, but it does little to “reopen the debate about oil supplies.” If anything, it is a canary in the coal mind. 

The oil will be pulled from deeper in the earth than Mount Everest is tall – six miles. It is 250 miles offshore, 100 miles from the nearest pipeline and in the world’s most active hurricane zone. There is nothing routine about this discovery.

These are unchartered waters and considering the cost of development and production - $3 to $4 billion, oil prices need to be in the $70-100 range (adjusted for inflation when the oil actually starts flowing) for Tiber to be profitable.

 BP doesn’t know how much oil is down there nor how long it will take to see it flow. They are speculating that the total find is about 3 billion barrels with an eventual peak flow rate of around 200,000 barrels per day. That's about one day's supply for the world in a year and 1% of our daily requirement. If history is a guide, no major oil will flow from Tiber for at least a decade.

There are many good things about Tiber- proof of exploration technology, additional reserves for the United States,  potential big benefits for our trade imbalance as we import less and huge taxes and royalty income for our citizens plus sustained employment for many people; but it doesn't change the clock on Peak Oil by any meaningful degree.

If anything, Tiber is proof of how hard it is to find oil, even with the amazing 3-D seismic and drilling technology now available. In order to reach the discovery, it took the deepest well ever drilled in the oil and gas industry.

The need to go this deep is a function of Peak Oil. It signals that the low hanging fruit, like setting up a land rig and poking a hole in the ground in Texas or Saudi Arabia, was picked long ago. Oil patch technology has become very good at revealing how little easy oil is left.

Along with all good things it brings, the Tiber discovery is a sign that we are near the Peak and time is short.

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About Chuck Taylor

Chuck Taylor

Chuck Taylor has held senior management positions with Nabisco Brands, Ryder System Inc., Burlington Northern/Santa Fe Railroad, Mercer Management Consultants, Tri Valley Growers, American National Can, ServiceCraft Logistics, and Norbridge Inc. and recently founded an organization called Awake! He founded Awake! out of concern the supply chain profession is not informed about the critical changes facing it with the end of cheap oil. One goal is to raise awareness so supply chain professionals will understand the stakes and take an active role in shaping energy policy.

Video: Chuck Taylor talks about the impact of oil prices on the supply chain.


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