"Just kiss your lifestyle goodbye"

Some experts believe that global oil production will peak as early as next year, radically changing the world as we know it.

Published April 21, 2005 1:57PM (EDT)

The one thing that international bankers don't want to hear is that the second Great Depression may be around the corner. But last week, a group of ultraconservative Swiss financiers asked a retired English petroleum geologist living in Ireland to tell them about the beginning of the end of the oil age.

They called Colin Campbell, who helped found the London-based Oil Depletion Analysis Center, because he is an industry man through and through, has no financial agenda and has spent most of a lifetime on the front line of oil exploration on three continents. He was chief geologist for Amoco, was a vice president of Fina and has worked for BP, Texaco, Shell, ChevronTexaco and Exxon in a dozen different countries.

"Don't worry about oil running out; it won't for very many years," the Oxford Ph.D. told the bankers in a message that he will repeat to businessmen, academics and investment analysts at a conference in Edinburgh, Scotland, next week. "The issue is the long downward slope that opens on the other side of peak production. Oil and gas dominate our lives, and their decline will change the world in radical and unpredictable ways," he says.

Campbell reckons global peak production of conventional oil -- the kind associated with gushing oil wells -- is approaching fast, perhaps even next year. His calculations are based on historical and present production data, published reserves and discoveries of companies and governments, estimates of reserves lodged with the U.S. Securities and Exchange Commission, speeches by oil chiefs and a deep knowledge of how the industry works.

"About 944 billion barrels of oil has so far been extracted, some 764 billion remains extractable in known fields, or reserves, and a further 142 billion of reserves are classed as "yet-to-find," meaning what oil is expected to be discovered. If this is so, then the overall oil peak arrives next year," he says.

If he is correct, then global oil production can be expected to decline steadily at about 2 to 3 percent a year, and the cost of everything from travel, heating, agriculture, trade and anything made of plastic will rise. And the scramble to control oil resources will intensify. As one U.S. analyst said this week: "Just kiss your lifestyle goodbye."

But the Campbell analysis is way off the much more optimistic official figures. The U.S. Geological Survey states that reserves in 2000 (its latest figures) of recoverable oil were about 3 trillion barrels and that peak production will not come for about 30 years. The International Energy Agency believes that oil will peak between 2013 and 2037, and Saudi Arabia, Kuwait, Iraq and Iran, four countries with much of the world's known reserves, report little if any depletion of reserves. Meanwhile, the oil companies -- which do not make public estimates of their own "peak oil" -- say there is no shortage of oil and gas for the long term. "The world holds enough proved reserves for 40 years of supply and at least 60 years of gas supply at current consumption rates," said BP this week.

Indeed, almost every year for 150 years, the oil industry has produced more than it did the year before, and predictions of oil running out or peaking have always been proved wrong. Today, the industry is producing about 83 million barrels a day, with big new fields in Azerbaijan, Angola, Algeria, the deep waters of the Gulf of Mexico and elsewhere soon expected on-stream.

But the business of estimating oil reserves is contentious and political. According to Campbell, companies seldom report their true findings for commercial reasons, and governments -- which own 90 percent of the reserves -- often lie. Most official figures, he says, are grossly unreliable: "Estimating reserves is a scientific business. There is a range of uncertainty, but it is not impossible to get a good idea of what a field contains. Reporting [reserves], however, is a political act."

According to Campbell and other oil industry sources, the two most widely used estimates of world oil reserves, drawn up by the Oil and Gas Journal and the BP Statistical Review, both rely on reserve estimates provided to them by governments and industry and do not question their accuracy. Companies, says Campbell, "underreport their new discoveries to comply with strict U.S. stock exchange rules, but then revise them upward over time," partly to boost their share prices with "good news" results. "I do not think that I ever told the truth about the size of a prospect. That was not the game we were in," he says. "As we were competing for funds with other subsidiaries around the world, we had to exaggerate."

Most serious of all, he and other oil depletion analysts and petroleum geologists, most of whom have been in the industry for years, accuse the United States of using questionable statistical probability models to calculate global reserves and OPEC countries of drastically revising upward their reserves in the 1980s. "The estimates for the OPEC countries were systematically exaggerated in the late 1980s to win a greater slice of the allocation cake. Middle East official reserves jumped 43 percent in just three years despite no new major finds," he says.

The study of "peak oil" -- the point at which half the total oil known to have existed in a field or a country has been consumed, beyond which extraction goes into irreversible decline -- used to be back-of-the envelope guesswork. It was not taken seriously by business or governments, mainly because oil has always been cheap and plentiful. In the wake of the Iraq war, the rapid economic rise of China, global warming and recent record oil prices, the debate has shifted from "if" there is a global peak to "when."

The U.S. government knows that conventional oil is running out fast. According to a report on oil shales and unconventional oil supplies prepared by the U.S. Office of Petroleum Reserves last year, "world oil reserves are being depleted three times as fast as they are being discovered. Oil is being produced from past discoveries, but the reserves are not being fully replaced. Remaining oil reserves of individual oil companies must continue to shrink. The disparity between increasing production and declining discoveries can only have one outcome: a practical supply limit will be reached and future supply to meet conventional oil demand will not be available."

It continues: "Although there is no agreement about the date that world oil production will peak, forecasts presented by USGS geologist Les Magoon, the Oil and Gas Journal, and others expect the peak will occur between 2003 and 2020. What is notable ... is that none extend beyond the year 2020, suggesting that the world may be facing shortfalls much sooner than expected."

According to Bill Powers, editor of the Canadian Energy Viewpoint investment journal, there is a growing belief among geologists who study world oil supply that production "is soon headed into an irreversible decline ... The U.S. government does not want to admit the reality of the situation. Dr. Campbell's thesis, and those of others like him, are becoming the mainstream."

In the absence of reliable official figures, geologists and analysts are turning to the grandfather of oil depletion analysis, M. King Hubbert, a Shell geologist who in 1956 showed mathematically that exploitation of any oil field follows a predictable "bell curve" trend, which is slow to take off, rises steeply, flattens and then descends again steeply. The biggest and easiest exploited oil fields were always found early in the history of exploration, while smaller ones were developed as production from the big fields declined. He accurately predicted that U.S. domestic oil production would peak around 1970, 40 years after the period of peak discovery around 1930.

Many oil analysts now take the "Hubbert peak" model seriously, and the USGS, national and oil company figures with a large dose of salt. Similar patterns of peak discovery and production have been found throughout all the world's main oil fields. The first North Sea discovery was in 1969, discoveries peaked in 1973 and the U.K. passed its production peak in 1999. The British portion of the basin is now in serious decline and the Norwegian sector has leveled off.

Other analysts are also questioning afresh the oil companies' data. U.S. Wall Street energy group Herold last month compared the stated reserves of the world's leading oil companies with their quoted discoveries and production levels. Herold predicts that the seven largest will all begin seeing production declines within four years. Deutsche Bank analysts report that global oil production will peak in 2014.

According to Chris Skrebowski, editor of Petroleum Review, a monthly magazine published by the Energy Institute in London, conventional oil reserves are now declining about 4 to 6 percent a year worldwide. He says 18 large oil-producing countries, including Britain, and 32 smaller ones, have declining production; and he expects Denmark, Malaysia, Brunei, China, Mexico and India all to reach their peak in the next few years.

"We should be worried. Time is short and we are not even at the point where we admit we have a problem," Skrebowski says. "Governments are always excessively optimistic. The problem is that the peak, which I think is 2008, is tomorrow in planning terms." On the other hand, Equatorial Guinea, Sao Tome, Chad and Angola are all expected to grow strongly.

What everyone agrees with is that world oil demand is surging. The International Energy Agency, which collates national figures and predicts demand, says developing countries could push demand up 47 percent, to 121 million barrels a day, by 2030, and that oil companies and oil-producing nations must spend about $100 billion a year to develop new supplies to keep pace. According to the IEA, demand rose faster in 2004 than in any year since 1976. China's oil consumption, which accounted for a third of extra global demand last year, grew 17 percent and is expected to double over 15 years to more than 10 million barrels a day -- half the United States' present demand. India's consumption is expected to rise by nearly 30 percent in the next five years. If world demand continues to grow at 2 percent a year, then almost 160 million barrels a day will need to be extracted in 2035, twice as much as today.

That, say most geologists, is almost inconceivable. According to industry consultants IHS Energy, 90 percent of all known reserves are now in production, suggesting that few major discoveries remain to be made. Shell says its reserves fell last year because it only found enough oil to replace 15 to 25 percent of what the company produced. BP told the U.S. stock exchange that it replaced only 89 percent of its production in 2004.

Moreover, oil supply is increasingly limited to a few giant fields, with 10 percent of all production coming from just four fields and 80 percent from fields discovered before 1970. Even finding a field the size of Ghawar in Saudi Arabia, by far the world's largest and said to have another 125 billion barrels, would meet world demand only for about 10 years.

"All the major discoveries were in the 1960s, since when they have been declining gradually over time, give or take the occasional spike and trough," says Campbell. "The whole world has now been seismically searched and picked over. Geological knowledge has improved enormously in the past 30 years, and it is almost inconceivable now that major fields remain to be found." He accepts that there may be a big field or two left in Russia, and more in Africa, but these would have little bearing on world supplies. Unconventional deposits like tar sands and shale may only slow the production decline.

"The first half of the oil age now closes," says Campbell. "It lasted 150 years and saw the rapid expansion of industry, transport, trade, agriculture and financial capital, allowing the population to expand sixfold. The second half now dawns, and it will be marked by the decline of oil and all that depends on it, including financial capital."

So did the Swiss bankers comprehend the seriousness of the situation when he talked to them? "There is no company on the stock exchange that doesn't make a tacit assumption about the availability of energy," says Campbell. "It is almost impossible for bankers to accept it. It is so out of their mindset."

By John Vidal

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