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21 July 2020

Some News from the Oil Peak

September 2020
Fossil fuels are a finite resource. It takes tens to hundreds of millions of years for organic matter (typically from biomass) to morph naturally into the energy-dense states that we know today as hydrocarbons: oil, gas and coal. At the rate at which we are extracting it from the ground, we will have depleted the reserve within...? Well, that’s exactly what is up for debate today…

In the 50’s, scientists had already realized that the cost of marginal extraction had all the reasons to climb to the sky as resources were getting depleted. The low-hanging fruits are cheap and easy to harvest (hit the Texas ground with a pick axe and the black gold will gush), but the small fruits high up in the tree may not be worth the effort. The moment in time when extraction becomes cost-prohibitive, oil production peaks, and decreases until it eventually stops entirely. The tip of oil production is referred to as Oil Peak.

Up to about 10 years ago, experts around the globe would have agreed that either the Peak had occurred already, or that it would certainly happen before 2020. In fact, the IEA considers that the peak for conventional extraction occurred in 2011. That was generally regarded as “bad news” for economic growth (an important growth resource becomes more and more scarce); but also as “good news” for environmentalists who were seeing this depletion of fossil resources as an opportunity to diversify our energy mix and develop truly sustainable energy solutions.

However, the story is not over. The Oil Peak theory relies on a set of very dynamic assumptions. One underlying assumption is that the cost for extraction will keep on increasing as oil fields are more and more difficult to reach and exploit. Under these conditions, if the market price for oil (and to some limited extent energy) remains at low levels, it will quickly become unattractive to explore and drill further and we reach the Peak relatively fast. In case the price of oil is high, there is room created for alternatives (such as renewables or hydrogen) to be developed, and the resource becomes less and less attractive; the price then drops until it reaches the cost of extraction and we meet the Peak again. However, what if the financial cost of extraction does not go up, but instead goes down? Then regardless of oil market price it still remains attractive for oil giants to keep exploring and exploiting further remote reserves, and the Peak is pushed back in time. That is exactly what is happening right now.

According to the IEA, the global conventional oil extraction already peaked in 2011, and since then, the daily production is only decreasing. However, fossil fuel production as a whole re-increased as unconventional fuel production has ballooned in the recent years.
The most disruptive extraction developments have been focusing on extracting what is commonly referred to as Shale Oil, typically using “fracking”. Fracking is a technology in which water is injected at very high pressure into the ground and fractures the hydrocarbon-containing rocks to release the oil. The financial lure for developing fracking is strong, and some countries are listening to this mermaid. As long as the global market oil price remains above $60/barrel (which was still the case in January 2020), shale oil exploitation is financially viable and somebody will take advantage of that!

The US is a shocking example of this. The figure below shows the expected oil production following the theories developed in the 50’s (Hubbert’s theory), with what actually happened in the last few years:
The green curve was following the theory until shale oils started to become extensively exploited in the USA, even granting for the USA the rank of number 1 crude oil producer in 2016. On the surface, and without other considerations, the US may boast about energy independence and may look like the shale oil move ten years ago was a winning one. Of course, there are very strong geopolitical forces globally fighting this trend. The OPEC oligopoly has all interest to keeping the oil price low enough, so that the shale oil companies have a harder and harder time paying back their humongous debts, pushing them out of business. The effect of the global pandemic are also not fully understood yet; the drastic reduction of global activity tanked oil prices, even driving crude oil prices to negative territories for some time (Yes - negative; oil is a liability and costs money to store when not consumed immediately). However, the reality is that despite strong OPEC synergies shale oil companies are coming out of the debt pit and the industry has been profitable in the USA since ~2017, so we do not expect this environmental nonsense to stop any time soon because of financial non-viability.

If not peaking now, when do we expect conventional as well as unconventional extraction to peak? Let's discuss that in our next article, coming up next week.
Mariam Radwan
Mariam Radwan
Sustainability Instructor at Eedama.

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