Saturday, September 24, 2011

Peak Oil: Laherrère responds to Yergin

Daniel Yergin
By Matthieu Auzanneau, Le Monde
Translated from French by Natasha

Jean Laherrère, co-founder of the Association for the Study of Peak Oil is a retired expert from Total. He picks apart the latest analysis from the champion of optimists, the American Daniel Yergin.

Daniel Yergin is back. The author of The Prize, an oft-cited history of oil which glorified the industry, last week has published an editorial in The Wall Street Journal, in advance of the release of his latest work, The Quest.

Daniel Yergin is the vice-president of IHS, a powerful economic intelligence agency considered to be very close to the major American oil companies. The arguments this first-rank analyst develops in the Wall Street Journal is a long-awaited counterattack on the proliferation of alarming forecasts for the future of global oil production.

Daniel Yergin admits that success in satisfying future demand for petroleum constitutes a “challenge”. But he says that he has severe doubts about the credibility of the members of ASPO, the Association for the Study of Peak Oil, who claim that this battle has already been lost, due to lack of sufficient oil reserves that remain to be exploited.

In his portrayal of the current situation, the vice-president of IHS omits a key fact: conventional oil production (the classical liquid oil which comprises 80% of the current crude oil supply) reached its absolute peak in 2006. The date of 2006 was predicted back in 1998 by Colin Campbell and Jean Laherrère, two petroleum geologists who founded ASPO.

And so I have asked Jean Laherrère, former chief of exploration technology at Total, to react to the key statements contained in the optimistic analysis provied by Daniel Yergin. 

Daniel Yergin: “Just in the years 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were added.” 

Jean Laherrère: Daniel Yergin cites official, political estimates published in the Oil & Gas Journal and by BP. According to these figures, global reserves were at 1253 billion barrels (Gb) in 2007 and at 1333 Gb in 2009, after the addition of 72 Gb of extra-heavy Orinoco oil discovered in Venezuela... in the late 1930s. What is, let us say, astounding about this, is that Mr. Yergin ignores confidential the figures from his own agency, IHS.

These figures, here they are. Note that they do not incude the extra-heavy oil

Discoveries (Gb)Production (Gb)

The reality is that for each barrel produced less than 0.5 barrels have been discovered, and not 1.6! Oil continues to be consumed faster than it is discovered. This situation has lasted for a quarter of a century now. 

Daniel Yergin: "One example [of revolutionary technology] is the "digital oil field," which uses sensors throughout the field to improve the data and communication between the field and a company's technology centers. If widely adopted, it could help to recover an enormous amount of additional oil worldwide—by one estimate, an extra 125 billion barrels, almost equivalent to the current estimate reserves of Iraq."

Jean Laherrère: It is at present quite fashionable to talk of the “digital oil field” to impress investors. But to this day I have not come across any mature field that has significantly increased its reserves by the use of this technology. To pretend to be able to grow reserves by 125 Gb thanks to this technology amounts to nothing more than wishful thinking, and does not stand up to any serious study. 

How does one increase the size of recoverable reserves of oil fields? Well, first of all, there are secondary recovery techniques: the use of water or gas injection to maintain field pressure. This is a practice that is in actual use from the very begginning on all new oil fields.

Tertiary recovery (or EOR, for “enhanced oil recovery”) is used to modify the properties of the liquids: thermal methods (by using steam), chemical, or injection of oil-soluble gases such as CO2. It's in the United States that EOR is most developed. And yet the number of EOR projects has gone down from about 500 in 1986 to only 200 in 2010. They yielded 600000 barrels per day (bpd) in 1986. From 1992 to 2000, they have remained level at around 750000 bpd. In 2010, they produced no more than 650000 bpd, and this despite high oil prices and the generous easing of environmental regulations of the Bush era.

Technology can do nothing to modify the geology of an oil reservoir! It just allows it to be produced faster, thereby accelerating the decline of mature fields... Here's an example: the very pronounced production declines at the giant Mexican Cantarell field, which made use of massive nitrogen injections.

The rate of recovery of a feld depends above all on the properties of the field and the liquid it contains. This rate can be as high as 80% for sandstone or very porous limestone, and might not exceed 1% for a tight reservoir with isolated pockets. 

Daniel Yergin: "A study by the U.S. Geological Survey found that 86 percent of oil reserves in the U.S. were the result not of what was estimated at the time of discovery but of revisions and additions from further development. "

Jean Laherrère: Evidence that the proven reserves of the United States do not increase: over the last decade, according to the US Department of Energy, the amount of upward revisions of U.S. reserves is roughly equal to the amount of downward revisions [pdf, see column 2: "net revisions"]. 

What allows Mr. Yergin to believe anything different? In the United States, reserves are reported according to the rules imposed by the SEC, the policeman of Wall Street. From 1977 to 2010, these rules required oil companies to report as "proved" only those reserves that were directly accessible by the wells already in production. The SEC prohibited the reporting of reserves called "probable" and found in the vicinity of these wells, even if the probability was very high.

This misleading rule was designed to protect the bankers who, if a producer went bankrupt, could decide to seize only the producing wells. This very narrow definition was anything but reliable, because it led to an underestimation of the actual reserves of American oil fields at the beginning of production, and their subsequent systematic upward re-evaluation.

Take, for example, the Kern River field, located in California. Since 2000, production from this old field has declined steadily. However, the amount of reserves reported for Kern River rose from 318 million barrels in 2000 to 542 million barrels in 2010. This amazing growth is due to the fact that between 2000 and 2010, 560 new wells were put into production (but failed to halt the decline of Kern River)!

Only the addition of both proven and probable reserves allows a field to be evaluated correctly. This method, called EPS, is now used everywhere the world—I actually participated in its development in 1997. Everywhere ... except in the United States. The growth of U.S. reserves which Mr. Yergin celebrates owes nothing to the advancement of technology: its cause is the incorrect method advocated by the SEC until 2010.

Moreover, since 2010, the SEC has lurched from one extreme to another. It now allows estimates of proved reserves not only from producing wells, but according to an evaluation model of the entire field that companies can keep secret! This new method supports all kinds of excesses and abuses, which have been denounced in the New York Times in particular.

This new SEC rule bore fruit in the form of the considerable growth of U.S. reserves of shale gas. Again, this has nothing to do with the implementation of technologies that are supposedly “new”, but which in reality have been there for thirty years, such as horizontal drilling and hydraulic fracturing of rocks. [Editor's note: land speculation fueled by questionable claims for reserves of shale gas is going to feed a large bubble in the U.S., according to an investigation by Ian Urbina New York Times, who is also the author of the article cited above.]

Daniel Yergin lies on reserves, just as Greece has lied about its deficits. Warning: in the world of energy, there are no rules—except to make money, and there are no referees and umpires! 

Finally, a little background. In 2005, Daniel Yergin published an editorial in the Washington Post in which he was already mocking the pessimists, and in which he predicted that by 2010 global oil production capacity could increase by 16 million barrels per day (Mb/d) from from 85 to 101 Mb/d. Since then, global production capacity remained on a plateau of about 86 Mb/d... You ought to go back and re-read yourself, Mr. Yergin.

[Daniel Yergin's editorial has elicited other strong reactions among those who support the hypothesis of an imminent decline in the global production of liquid fuels. These include, notably, an on-line article by Professor Kjell Aleklett, president of ASPO International.

In 2008, Glenn Morton, a an American geophysicist and investor, published what he presented as an inventory of the optimistic but incorrect predictions about the state of the oil market provided over the years by Daniel Yergin and IHS.]


jpwhite said...

I'm not sure why everyone is freaking out over this guy. He's just julian Simon with a slightly higher IQ. The people who pay for his "analysis" of the energy situation already know what they want to hear, and are unlikely to be swayed by rebuttals. And the market for telling people what they want to hear is never going away, collapse or no collapse.

Dmitry Orlov said...

Nobody is freaking out, but it seems like a good opportunity to reach out to those who still think that there is a "peak oil debate" or some such, since the other side's champion is 1. a liar as far as facts and 2. a loser as far as making predictions. It is hard to resist the urge to point and laugh, and, here you are right, move right along to more important things, leaving the Yergins and the lemmings behind.

escapefromwisconsin said...

Is it just me, or does that picture of Yergin look eerily like Hannibal Lecter?

"Has the oil stopped flowing, Clarice?" (slurping sounds)

Patrick said...

"Has the oil stopped flowing, Clarice?" (slurping sounds)

I laughed out loud at this.

A sense of humor is critical to getting along in these times.

russell1200 said...

JP: because it got a huge front page spread on the Review section of the Wall Street Journal.

Econbrowser also had a reply:

They also had a recent post on more technical aspects of oil futures pricing.

The Silver Sentinel said...


I'm a longtime reader, first time commenter...
Just wanted to thank you for your efforts. Your blog and books have helped me awaken and shift my life onto more plausible pathways.
Please post again soon - if only to get the creature Yergin out of view.