Running on empty

The leading energy analysts who foretold Enron's demise have an alarming new claim: The world's major oil companies are almost tapped out.

Topics: Energy,

Running on empty

Four years ago, the analysts at John S. Herold Inc. were the first to call bullshit on Enron. On Feb. 21, 2001, three Herold analysts issued a report that said Enron’s profit margins were shriveling, the company had too few hard assets, and its stock price was way too high. Less than ten months later, Enron filed for bankruptcy.

Today, the analysts at Herold — a research-only firm that issues valuations on several hundred publicly traded energy companies — are making predictions even bolder than their call on Enron. They have begun estimating when each of the world’s biggest energy companies will peak in its ability to produce oil and gas. Herold’s work shows that the best minds in the energy industry are accepting the reality that the globe is reaching (or has already reached) the limit of its own ability to produce ever increasing amounts of oil.

Many analysts have estimated when the earth will reach its peak oil production. Others have done estimates on when individual countries will hit their peaks. Herold is the first Wall Street firm to predict when specific energy companies will hit their peaks.

Since last fall, Herold has done peak estimates on about two dozen oil companies. Herold believes that the French oil company, Total S.A., will reach its peak production in 2007. Herold expects 2008 to be critical, with Exxon Mobil Corp., ConocoPhillips Co., BP, Royal Dutch/Shell Group, and the Italian producer, Eni S.p.A., all hitting their peaks. In 2009, Herold expects ChevronTexaco Corp. to peak. In Herold’s view, each of the world’s seven largest publicly traded oil companies will begin seeing production declines within the next 48 months or so.

Executive vice president Richard Gordon, who heads Herold’s global strategies team, says the firm’s goal in doing peak-production estimates for individual oil companies is simple: “If the dinosaurs are going extinct, we are trying to figure out which ones are going to go extinct the soonest.”

Herold’s projections have enormous ramifications both for stockholders in the major oil companies and for every energy consumer on the globe. If Herold is correct, and the world’s biggest oil companies cannot increase their production in the coming years, then several things appear certain:

  • Oil prices — which are already at record levels — will continue rising as demand outstrips supply. In a few years, gasoline prices of $2 per gallon could seem like a bargain.
  • State-owned oil companies like Mexico’s Pemex, Venezuela’s PDVSA (Petroléos de Venezuela) and Saudi Arabia’s Saudi Aramco may be unable to increase their production enough to meet burgeoning global demand.
  • The producers who belong to the Organization of the Petroleum Exporting Countries, and Saudi Arabia in particular, may have even more leverage over the global oil market in the coming years.
  • The United States will be ever more reliant on oil imported from countries filled with people who don’t like George W. Bush or his policies.
  • While Herold’s projections provide ammunition to the growing chorus of analysts who believe peak oil is imminent, they are not being welcomed by the oil companies. Last month, when I asked ChevronTexaco’s chairman and CEO, David J. O’Reilly, to respond to Herold’s projection that his company would reach its peak production in 2009, he replied snappishly, “I’m not going to comment on that.”

    A spokesman for Royal Dutch/Shell in London was similarly coy, saying in an e-mail that the company had “no comment” on Herold’s projection. However, the company’s spokesman, Simon Buerk, pointed to a September 2004 report published by Shell that predicts the company will be producing the equivalent of 4.5 million barrels of oil per day by 2014, not the 4 million barrels per day that Herold foresees for that time frame.

    Charley Maxwell, an analyst at Weeden & Co., a Connecticut brokerage, says oil industry officials are loath to discuss Herold’s projections because doing so would “circumscribe their future prospects and the future growth of their stock, and executives have no interest in doing that since so much of their compensation is tied to their stock options.” Maxwell, one of the most respected stock pickers in the energy business, believes the non-OPEC oil producers will hit their peak oil production in the next five years. And he applauds Herold’s research, saying that no other reputable firm “has been willing to make this type of prediction.”

    Another energy industry veteran, John Olson, co-manager of Houston Energy Partners, an energy hedge fund, agrees. Olson believes that Herold’s predictions about peak production are “very significant. It is perhaps the first cannon ball over the bow of a big tanker.”

    But Herold has its critics. Brian J. Jennings, the chief financial officer of Oklahoma City’s Devon Energy Corp., which Herold believes will hit its peak in 2009, says that Herold’s analysis is “a truncated look at the company. It assumes that nothing we are going to do over the next five years will increase our production.” Jennings says Devon expects to increase its oil production by 25 percent over the next five years — and that figure does not include fields that the company is developing in the Gulf of Mexico.

    Of course, scientists, pundits and oil men have been predicting that the world will run out of oil ever since the gusher blew at Spindletop in Texas in 1901. Despite those predictions, the last century has been one of unbroken increases in supply. Each year, the oil industry has produced more oil than it did the year before. Today, the industry is producing about 83 million barrels of oil per day. New oil fields in the deep-water Gulf of Mexico, in the Caspian Sea and in Saudi Arabia will soon begin pumping oil onto the global market. Plus, huge deposits of oil are available in the Canadian tar sands and American oil shale.

    But turning tar sands and shale into motor fuel is a very expensive proposition. And those new, unconventional oil sources may be insufficient to replace the decline in production from existing fields, which deplete by about 6 percent per year. Further, they may be too small to quench the demand from the developing world — China in particular. Last month, at a conference in Houston, Zhu Yu, the president of China’s Sinopec Economics and Development Research Institute, said that between January and September of 2004, motor fuel use in his country soared by 20 percent. Yu also predicted that China’s oil consumption will double over the next 15 years to more than 10 million barrels of oil per day. Meanwhile, the Energy Information Administration expects India’s oil consumption to increase by nearly 30 percent over the next five years.

    The oil industry has plenty of other reasons to be nervous. The royal rulers of Saudi Arabia, the world’s biggest producer, appear vulnerable to terrorist attacks and civil unrest. The Saudi government’s biggest enemy, Osama bin Laden, has focused his ire on both the Saudi royals and the oil infrastructure in the Persian Gulf. And his loyalists are eager to attack both of those targets.

    In Iraq, insurgents are continually attacking that country’s oil infrastructure — thereby crippling the war-torn nation’s economy and its future prospects. In Venezuela, which has the biggest oil deposits in the Western hemisphere, president Hugo Chavez has threatened to cut off the flow of oil to the United States if the Bush administration continues its efforts to undermine his government. In Russia, president Vladimir Putin’s brazen, state-sponsored theft of Yukos, one of that country’s biggest oil companies — and his jailing of the company’s CEO, Mikhail Khordokovsky — is likely to slow investment in Russian oil fields for years.

    Furthermore, spare oil-production capacity has largely disappeared. Oil producers are running their wells at maximum capacity. Indonesia, a member of OPEC, cannot meet its OPEC quota of 1.4 million barrels per day. In February, Indonesia was able to produce only 942,000 barrels per day, its lowest level of production in 34 years. And last week, Algeria’s energy minister, Chakib Khelil, said that OPEC “does not have the production capacity to increase its quotas.”

    All of these factors are sending oil prices to record highs. Monday’s NYMEX closing price for light sweet crude was $54.95 per barrel. Last week, the Department of Energy issued a report saying that it expects prices to stay near or above $50 per barrel for the rest of this year. That’s a big change for an agency that has always been conservative in its price projects. At about this same time last year, the agency was predicting that oil would cost about $29 per barrel throughout 2005.

    Whatever price projections are used, it’s increasingly clear that the era of cheap oil is over and that oil companies are having a harder time finding new oil to replace the oil they’re pumping. In short, it appears that the late M. King Hubbert, a geophysicist who worked for Shell in Houston, is being proved right. In the 1950s, Hubbert used mathematical models to predict that American oil production would peak in the early 1970s. That’s exactly what happened. Now, Hubbert’s theories are being tested on a global scale.

    Herold’s owner and CEO, Art Smith, is a believer in Hubbert’s work. Smith and his fellow analysts at Herold have been building their peak production databases since 1996. About 10 months ago, Herold began publishing what it calls “strategic evaluations” of specific companies, which include graphics showing when that company will reach its peak production. Herold does not do geologic analysis. Instead, its analysts mine the company’s filings with the Securities and Exchange Commission. It also looks at the oil properties that the company has acquired or sold, along with new projects being drilled, and older oil fields in the company’s portfolio. “We look at this data, put it into a financial model, and start asking questions,” says Herold analyst Gordon.

    Herold isn’t the only Wall Street firm considering the issue of peak oil. In early December, Deutsche Bank issued a report that predicted global oil production will peak in 2014. The Deutsche Bank report also stresses political instability and China’s surging demand. Those factors, Deutsche Bank believes, “could trigger a shortage shock leading to a price crisis.”

    And while many analysts in Houston are convinced a peak in global production is in the offing, there are others who believe that today’s high prices will trigger a surge in new oil production. David Pursell, a partner at Pickering Energy Partners, a Houston brokerage, says with oil at $50 per barrel, “a whole lot of oil fields that used to be woefully uneconomic suddenly become profitable and that means that any peak projections get delayed.” Although Pursell is not ready to agree with Herold’s projections about individual energy companies, he — along with virtually everyone else in the oil industry — agrees that the era of cheap energy is over and that America must begin adapting to the new geopolitical realities that come with that fact. Alas, it appears the Bush administration hasn’t made that same transition.

    Last week, President Bush gave a speech on energy policy in Columbus, Ohio, in which he encouraged Congress to pass an energy bill. Once again, he touted his plan to drill for oil in the Arctic National Wildlife Refuge, a move he said would “eventually reduce our dependence on foreign oil by up to a million barrels of oil a day.” The key word here is “eventually.” Even if approvals for drilling ANWR were granted immediately, the first oil from the refuge would not reach the continental United States for years. Furthermore, as the New York Times reported last month, it appears that the major oil companies may have cooled in their desire to drill in the refuge. During his speech, Bush also talked about efficiency measures that could save homeowners electricity. But during his 4,600-word, 35-minute-long speech, Bush uttered the words “hybrid vehicle” exactly one time.

    It’s astonishing that Bush, the former Texas oil man, still doesn’t understand the fundamental problem of America’s imported oil addiction. Nor does he appear to grasp the threat that is posed by the possibility of peak oil.

    The majority of the oil that the United States imports from places like Saudi Arabia and Venezuela is used as motor fuel in automobiles. Yet the president conflated the idea that burning more coal and building more nuclear power plants will somehow allow America to reduce its oil imports. In his speech, Bush refused to discuss the obvious: We cannot cut our oil imports (read: gasoline addiction) without dramatic changes to our auto fleet. At some point, the United States will have to force the automakers to build more efficient automobiles. And a key part of that efficiency changeover will mean replacing increasing numbers of America’s 200 million cars and trucks with hybrid vehicles.

    Even some of Washington’s most hawkish neoconservatives are embracing the idea of high-mileage hybrid vehicles. Former CIA director James Woolsey, a key backer of the war in Iraq, is driving a Toyota Prius. Woolsey, along with neocons like Frank Gaffney have begun preaching the Greens’ gospel of energy efficiency. The neocons haven’t joined the Sierra Club. Instead, they’re arguing that energy conservation is simply smart strategy when dealing with the Muslim extremists who reside in the oil-rich countries of the Persian Gulf. But so far, the neocons haven’t been able to get Bush’s ear.

    Remarkably, when it comes to thinking about peak oil and what it means for the future of America, Wall Street analysts and neocons are taking the lead, while the former oil man from Midland keeps his head up his tailpipe.

    More Related Stories

    Featured Slide Shows

    • Share on Twitter
    • Share on Facebook
    • 1 of 14
    • Close
    • Fullscreen
    • Thumbnails

      13 of "Girls'" most cringeworthy sex scenes

      Hannah and Adam, "Pilot"

      One of our first exposures to uncomfortable “Girls” sex comes early, in the pilot episode, when Hannah and Adam “get feisty” (a phrase Hannah hates) on the couch. The pair is about to go at it doggy-style when Adam nearly inserts his penis in “the wrong hole,” and after Hannah corrects him, she awkwardly explains her lack of desire to have anal sex in too many words. “Hey, let’s play the quiet game,” Adam says, thrusting. And so the romance begins.

      13 of "Girls'" most cringeworthy sex scenes

      Marnie and Elijah, "It's About Time"

      In an act of “betrayal” that messes up each of their relationships with Hannah, Marnie and Elijah open Season 2 with some more couch sex, which is almost unbearable to watch. Elijah, who is trying to explore the “hetero side” of his bisexuality, can’t maintain his erection, and the entire affair ends in very uncomfortable silence.

      13 of "Girls'" most cringeworthy sex scenes

      Marnie and Charlie, "Vagina Panic"

      Poor Charlie. While he and Marnie have their fair share of uncomfortable sex over the course of their relationship, one of the saddest moments (aside from Marnie breaking up with him during intercourse) is when Marnie encourages him to penetrate her from behind so she doesn’t have to look at him. “This feels so good,” Charlie says. “We have to go slow.” Poor sucker.

      13 of "Girls'" most cringeworthy sex scenes

      Shoshanna and camp friend Matt, "Hannah's Diary"

      We’d be remiss not to mention Shoshanna’s effort to lose her virginity to an old camp friend, who tells her how “weird” it is that he “loves to eat pussy” moments before she admits she’s never “done it” before. At least it paves the way for the uncomfortable sex we later get to watch her have with Ray?

      13 of "Girls'" most cringeworthy sex scenes

      Hannah and Adam, "Hard Being Easy"

      On the heels of trying (unsuccessfully) to determine the status of her early relationship with Adam, Hannah walks by her future boyfriend’s bedroom to find him masturbating alone, in one of the strangest scenes of the first season. As Adam jerks off and refuses to let Hannah participate beyond telling him how much she likes watching, we see some serious (and odd) character development ... which ends with Hannah taking a hundred-dollar bill from Adam’s wallet, for cab fare and pizza (as well as her services).

      13 of "Girls'" most cringeworthy sex scenes

      Marnie and Booth Jonathan, "Bad Friend"

      Oh, Booth Jonathan -- the little man who “knows how to do things.” After he turns Marnie on enough to make her masturbate in the bathroom at the gallery where she works, Booth finally seals the deal in a mortifying and nearly painful to watch sex scene that tells us pretty much everything we need to know about how much Marnie is willing to fake it.

      13 of "Girls'" most cringeworthy sex scenes

      Tad and Loreen, "The Return"

      The only sex scene in the series not to feature one of the main characters, Hannah’s parents’ showertime anniversary celebration is easily one of the most cringe-worthy moments of the show’s first season. Even Hannah’s mother, Loreen, observes how embarrassing the situation is, which ends with her husband, Tad, slipping out of the shower and falling naked and unconscious on the bathroom floor.

      13 of "Girls'" most cringeworthy sex scenes

      Hannah and the pharmacist, "The Return"

      Tad and Loreen aren’t the only ones to get some during Hannah’s first season trip home to Michigan. The show’s protagonist finds herself in bed with a former high school classmate, who doesn’t exactly enjoy it when Hannah puts one of her fingers near his anus. “I’m tight like a baby, right?” Hannah asks at one point. Time to press pause.

      13 of "Girls'" most cringeworthy sex scenes

      Hannah and Adam, "Role-Play"

      While it’s not quite a full-on, all-out sex scene, Hannah and Adam’s attempt at role play in Season 3 is certainly an intimate encounter to behold (or not). Hannah dons a blond wig and gets a little too into her role, giving a melodramatic performance that ends with a passerby punching Adam in the face. So there’s that.

      13 of "Girls'" most cringeworthy sex scenes

      Shoshanna and Ray, "Together"

      As Shoshanna and Ray near the end of their relationship, we can see their sexual chemistry getting worse and worse. It’s no more evident than when Ray is penetrating a clothed and visibly horrified Shoshanna from behind, who ends the encounter by asking if her partner will just “get out of me.”

      13 of "Girls'" most cringeworthy sex scenes

      Hannah and Frank, "Video Games"

      Hannah, Jessa’s 19-year-old stepbrother, a graveyard and too much chatting. Need we say more about how uncomfortable this sex is to watch?

      13 of "Girls'" most cringeworthy sex scenes

      Marnie and Desi, "Iowa"

      Who gets her butt motorboated? Is this a real thing? Aside from the questionable logistics and reality of Marnie and Desi’s analingus scene, there’s also the awkward moment when Marnie confuses her partner’s declaration of love for licking her butthole with love for her. Oh, Marnie.

      13 of "Girls'" most cringeworthy sex scenes

      Hannah and Adam, "Vagina Panic"

      There is too much in this scene to dissect: fantasies of an 11-year-old girl with a Cabbage Patch lunchbox, excessive references to that little girl as a “slut” and Adam ripping off a condom to ejaculate on Hannah’s chest. No wonder it ends with Hannah saying she almost came.

    • Recent Slide Shows



    Comment Preview

    Your name will appear as username ( settings | log out )

    You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>