Prognosis and Conclusions: Oil from a Critical Raw Material Perspective

By Simon Michaux
(This is the Prognosis and Conclusions section, Chapter 20, pages 310-310, from the enormous report from Geological Survey of Finland, 12/22/2019, “Oil from a Critical Raw Material Perspective.” These conclusions buttress the argument made by Richard Heinberg of Post-Carbon Institute that the industrial era economy has reached the “End of Growth.”) The full PDF file, all 512 pages, is stored here on the blog and appears below this cover-page image in a BLUE LINK, so click the “Download” button if you wish to save it on your drive for later reading…

Conclusions of this report are as follows:
20.1Relevance of oil
 Oil may be the most critical of the raw material resources the current industrial ecosystem consumes. It correlates strongly with industrial output (YOY% change in Chinese Industrial output and economic activity (% change in GDP) (Figure 26).
 Charts that relate oil to steel, coal, GDP all can map the major turning points in the global industrial ecosystem (Figures 22 to 24).
 Industrial agriculture is dependent on oil to function. The World Bank Food Index and the World Bank crude oil index correlate strongly (Figure 33). The production of food is dependent on oil, and petroleum products at several places along the value chain.
 There is a correlation between the price of food, the price of oil and civil unrest. When the price of food passes 205 on the World Bank Food Index, incidence of civil unrest increases (Figure 36).
 14% of oil consumption in 2018 was used in the petrochemical industry (manufacture of plastics and fertilizers). There is no viable substitute for oil as a raw material input into the petrochemical industry.
 Oil price may be the most effective data signature to study to map the evolution of the current industrial ecosystem.
 Oil has facilitated that exponential growth of our society, industrial complexity and technological capability (Figure 17). For this reason, oil production correlates with human population.
 Oil is the most calorically dense energy resource. All other resources would have to be used in greater quantities or at much greater levels of efficiency to replace what oil contributes to our system.
 In 2018, fossil fuels accounted for 84.7% of primary energy consumption.
 Oil accounts for 33.62% of global primary energy consumption in 2018.
 Currently Europe is heavily dependent on fossil fuels (71% of energy consumed) and oil (86% of energy consumed).
 47.5% of oil and petroleum products in Europe is consumed by transport.
 70.56% of oil and petroleum products in the United States is consumed by transport  Due to the critical contribution oil makes to our industrial society, a change in supply will have measureable consequences across the whole ecosystem.

  1. Oil Reserves
     Total global proved reserves at the end of 2018 was 1729.7 thousand million barrels or 244.1 billion metric tons.
     Most oil and gas deposit discoveries happened decades ago, with most of it prior to 1970.
     In the year 2017, explorers replaced just 6% of resources consumed.
     The maximum of net addition to global oil reserve inventory was in 1981 (Figure 221).
    20.3 New oil deposit discovery rate
     Peak oil discovery was in 1962, since then rates of resource discovery has been declining persistently (Figure 219 and 221).
     New discoveries are limited: the exploration success rate in 2017 was a record low of 5%, and the average discovery size was 24 million barrels. This is also called Reserves Replacement Ratio, where less oil quantity is discovered than is consumed in a given time period (annual).
     The quantities discovered in 2017, 2018 and 2019 were the lowest on record since the initial discovery of oil. This discovery rate is about 1/10th of the discovery rate in the 1960’s.
    20.4 Oil Production Supply
     Global conventional crude oil produced in 2018 was 94.718 million barrels per day (or 4474.3 million tonnes).
     The oil market may be oversupplied with an ‘oil glut’ at the time of writing this report.  Approximately 70% of our daily oil supply comes from oil fields discovered prior to 1970.
     Most of global oil supply comes from 10 to 20 huge oil fields. In 2006, 10 oil fields accounted for 29.9% of the global proved reserves.
     Production of oil is sourced from different methods of extraction
    o Conventional on shore oil extraction 60.27%
    o Conventional offshore shallow water oil extraction 21.59%
    o Conventional offshore deep water oil extraction 8.10%
    o U.S. Tight Oil (Fracking) oil extraction 6.93%
    o Canadian Oil Sands oil extraction 3.10%
     Three nation states (United States 16.16%, Saudi Arabia 12.97% and Russian Federation 12.08%) dominate the global oil supply with 41.2% of the market between them.
     74% of the current global oil reserves is geographically concentrated in what is termed the Strategic Ellipse, which is the Middle East and Central Asia.
     The quality of oil being extracted is degrading. The sulfur content is increasing. Most oil being extracted currently is increasingly heavy and sour.
     Conventional crude oil plateaued in January 2005. In late 2013, it broke the plateau and started to increase once more.
     In January 2005, Saudi Arabia increased its number of operating rig count by 144%, to increase oil production by only 6.5%. This suggests that the market swing producer (as Saudi Arabia was
    seen) was not able increase production enough to meet increasing demand.
     Since then, unconventional oil sources like tight oil (fracked Tight Oil, and oil sands) have made up the demand shortfall.
     The cost of oil exploration is rising.
     The required CAPEX for oil operations is rising.
     The cost of OPEX oil production is rising.
    20.5Oil Demand Consumption
     Global consumption for oil in 2018 was 99.843 million barrels per day.
     When the market returns to demand taking up all global supply, effective spare capacity could shrink to just 1% of global supply/demand of 99 million barrels per day, leaving the market far
    more susceptible to disruptions than has been the case in recent years.
     The three largest economies in the world (United States, Europe EU-28 and China), which represent 65% of global GDP and % of global oil demand are dependent on oil imports.
    o United States – 2018 deficit of 5 145 kbbls/day or 25.2% of domestic demand
    o EU-28 – 2018 deficit of 11 769 kbbls/day or 88.5% of domestic demand
    o China – 2018 deficit of 9 727 kbbls/day or 72% of domestic demand
     Oil demand is still growing by ~1mbd every year, and no central scenarios that recently was assessed predict oil demand peaking before 2040.
     Global demand for crude oil in 2040 is predicted to be approximately 120 million barrels per day (EIA International Energy Outlook 2019 with projections to 2050). In 2050, global demand is predicted to be approximately 127 million barrels per day.
     If the BRIC economies (Brazil, Russia, India and China) was to become as developed as the German economy in context of oil consumption, the BRIC economy 2018 oil consumption would
    have to expand by 254%.
     If the whole World was to become as developed as the 2018 German economy in context of oil consumption in 2018, the global oil consumption of 99.84 mbpd would have to expand by 117%
    and an extra 116.68 mbpd of oil would need to be brought to market.
    20.6US Tight Oil (Fracked Oil Shale)
     US tight oil produced in August 2019 was 7.73 million barrels per day, approximately 8.37% of global supply.
     The Oil Shale Revolution was facilitated by the application of precision horizontal drilling technology to the existing hydraulic fracking industry. This allowed a vast increase in production, very quickly.
     The U.S. tight oil sector accounted for 98% of global oil production growth in 2018.
     The U.S. tight oil sector accounted for 71.4% of new capacity of global oil between 2005 and 2019.
     The U.S. Tight Oil sector is dominated with just three of the basin plays. The Permian play, The Bakken Play (also known as Williston) and the Eagle Ford play account for 85% of the U.S. Tight Oil production. These three oil plays account for 60% of total U.S. oil production. Global demand growth is now dependent on the U.S. tight oil sector.
     Fracked well average production increased between 2010 and 2018 by 28%, but also water injection (and therefore chemical and proppant use) increased by 118%. This is an average across the whole U.S. Tight Oil Sector.
     Hydraulic fracked wells (used in Tight Oil) go through four basic stages in their life cycle. The three biggest tight oil producer basins of Permian, Eagle Ford and Bakken are all still growing but are in the mature stage of their life cycles. Mature is the third of four stages, where the fourth is decline.
     The productivity (per rig as measured by EIA) of the U.S. Tight Oil sector in 2018 is less effective than in 2016. This suggests that the U.S. Tight Oil sector is approaching its peak production reasonably soon.
     At the time of writing this report (Nov 2019), the United States had become self-sufficient in oil production. This is largely due to the production achievements in the U.S. Tight Oil sector.
     Tight Oil requires much greater meters of drilling per unit of oil produced compared to conventional oil production over their respective life cycles.
     Due to well depletion in fracking, 5 399 new wells are needed to be drilled to keep the U.S. Tight oil production consistent in 2019. Each year a similar number of new wells are required.

     The environmental impacts of fracking tight oil is being largely ignored. Most of these are related to water way pollution and destruction of forestation habitat.
     Most tight oil operations are not economically viable without government subsidy in the current market. Currently, 9 out of 10 oil producers in the tight oil U.S. fracking sector have a negative cash flow.
     The U.S. Tight oil sector is heavily dependent on continued upfront capital investment in infrastructure and to maintain well drilling rates, to keep production consistent.
     The U.S. oil production peaked in 25th of January 2019, and dropped to 19th July 2019, with a decline of 1.1 million barrels a day.
  1. 20.7Canadian Oil Sands
     The Canadian capacity to export oil is almost entirely dependent on the oil sands (also called tar sands) production, accounting for 64% of Canadian oil production, or 2.9 million barrels a day. Most of this is heavy quality crude.
     The environmental impacts of oil sands oil/bitumen extraction is being largely ignored. Most of these are related to water way pollution and destruction of forestation habitat.
    20.8Oil Refining
     The U.S. refined 20.45% of the global oil supply in 2018. The U.S. represents 18.75% of global refining capacity.
     China refined 15.0% of the global oil supply in 2018. China represents 15.65% of global refining capacity.
    20.9Depletion of existing oil reserves and decline of production
     81% of existing world liquids production is already in decline (excluding future redevelopments).
     A projected range for average decline rate on post-peak production is 5-7%, equivalent to around 3-4.5mb/d of lost production every year.
     If 80% of the 2018 global supply of crude oil (94 718 thousand bbls/day – Appendix D) declined at a rate of 5% per year (Fustier et al 2016), by 2040, global crude oil supply would be 43 459 thousand barrels per day. To maintain 2018 global production rates of 94 718 kbbls/day, an extra 51 258 kbbs/day of production would have to be delivered to the market. This is 4.17 times the 2018 Saudi Arabian production rate (12 287 kbbls/day – Appendix D). Alternatively, if the Saudi Arabian elephant field Ghawar continues to produce 3.8 million barrels a day, then an extra 13.5 new oil fields the same size of Ghawar would need to be discovered, then
    developed to operate by 2040, just to maintain 2018 rates of global supply.
     If the projected global demand in 2040 is to be met (120 million barrels per day), an extra 25282 thousand barrels per day of consistent production capacity would have to be found in addition
    to the 2018 production capacity. To put this in perspective, this extra capacity would be a further 6.65 Ghawar fields.
     Small oilfields typically decline twice as fast as large fields, and the global supply mix relies increasingly on small fields: the typical new oilfield size has fallen from 500-1000mb 40 years ago to only 75mb this decade.
     A case can be made that the Saudi Arabia Ghawar field has passed its peak production. In any case, stated Ghawar production is substantially less at 3.8 mb/d, not the believed 5mb/d. (as
    per the Saudi Arabia Aramco IPO).
     Between January 2005 and September 2006, the Saudi Arabian oil rig count increased by 396%. Oil production in the same time period increased by 21%. The Saudi Arabian oil production productivity dropped in January 2005 and has consistently declined. This suggests that Saudi Arabia is approaching it peak production date.
     Energy Returned on Energy Invested (ERoEI) for oil has been declining for decades. Peak usefulness was approximately 1960.  Step-change improvements in production and drilling efficiency in response to the downturn have masked underlying decline rates at many companies, but the degree to which they can continue to do so is becoming much more limited.

20.10 Oil Investment
 The oil industry is now highly dependent on up front capital.
 70% of investment in energy supply is government driven. The rest is market driven.
 The Compound Annual Growth Rate (CAGR) changed in 2000 from 0.9% to 10.9%.
 This suggests that the oil industry has shifted from a demand constrained system to a supply constrained system.
20.11 Different eras of economic and industrial activity seen in the oil market
 The year 2005 was highly significant to the industrial ecosystem (Figure 288). The oil market became inelastic in supply in this year. Supply and demand of oil separated. The metal price of many metals blew out. The Baltic Dry Index (BDI) started a hyperinflationary bubble. The US domestic oil consumption vs vehicle miles driven chart peaked and then declined. The years
2005 to 2011 were fundamentally different to prior to 2005 (Figure 249).
 The years 2008 to 2011 were distinguished by the Global Financial Crisis, the second worst economic correction in history (as defined by the IMF).
 The years 2012 to 2014 were distinctly different again. This era was defined by the effectiveness of quantitative easing (Figure 249).
 The years 2014 to 2019 were defined by a lack of quantitative easing. QE3 finished on October 2014 (Figure 249).