Autonomous Vehicle Consultant

Considerable Gold Rush buzz is streaming throughout the news media about U.S. oil production. According to the Economist, “On November 12th the International Energy Agency (IEA), the rich world’s energy club, forecast that America could become the world’s largest oil producer by 2020, outstripping Saudi Arabia and Russia.” Similar exhilarating headlines are found in Forbes, Bloomberg, and Reuters.

These predictions are based oil production increases using advances in hydraulic fracturing (“fracking”) and horizontal drilling utilized in tight oil formations, such as Eagle Ford, Bakken and several others. Yes, oil production from tight formations (i.e., shale) has increased nearly exponentially in the Bakken play (now approaching 700,000 barrels per day) to the point where there is insufficient pipeline capacity for oil transfer to refineries. Statoil, a Norwegian energy company, has leased 1000 train tank cars to move Bakken oil. (One of my blog posts noted that Statoil has declining oil reserves in the North Sea, and is expanding its overseas operations to offset domestic loses.)

U.S. Oil Production by 2020: Figure 1 shows U.S. tight oil production from 2000 through 2012. Notice that production was flat until around 2006 – 2008 when horizontal drilling and fracking contributed enormous gains. “Tight oil refers to crude oil and condensates that are produced from low permeability sandstone, carbonate, and shale formations. The tight oil Technically Recoverable Resources (TRRs) are for the entire formation, including the non-shale portions.” Definitions of TTR and Estimated Ultimate Reserves (EUR) can be found in this reference.

Figure 1. Tight oil production

Figure 1 is also note worthy because it indicates a possible tight oil production peak starting around 2011 and may foretell a production decline. There is considerable controversy regarding decline rates of shale oil wells that are produced by fracking and horizontal drilling. There is reason to suspect that decline rates from these wells are different (i.e., steeper) than the traditional, vertically drilled wells. Petroleum geologist Arthur Berman and the analyst   Rune Likvern have shed considerable light on this issue.

Figure 2 illustrates projected tight oil production out to 2035 based on several scenarios (i.e., high TRR, high EUR, reference case and low EUR). Considering the most optimistic case (i.e., high TRR), this figure indicates that by 2020, tight oil production will be approximately 2.5 MM barrels/day (b/d). [Note: M = 1000; MM = 1,000,000]. To estimate the total expected U.S. oil production from known reservoirs by 2020, one should include production from traditional vertical wells from the lower 48 states, Alaska, and the U.S. Gulf of Mexico. These reserves have been declining for years.

By “eye balling” these traditional oil reserves out to 2020, we obtain 4 MM b/d (lower 48 states), 0.400 MM b/d (Alaska) and 0.6 MM b/d (Gulf of Mexico) for a total of 5 MM b/d. Adding the tight oil production projection for 2020 (i.e., 2.5 MM b/d) to the 5 MM b/d figure, the total U.S. domestic production for 2020 is 7.5 MM b/d.

Figure 2. Prediction of tight oil production

Conclusion: As of 2011, Russian oil production was 10 MM b/d, while Saudi Arabia had 11 MM b/d. Assuming that these production levels continue, more or less, to 2020, it is highly unlikely that the United States oil production will ever exceed Saudi Arabian and Russian production. Perhaps the major news sources cited previously will come forward to justify their overstated headlines.

U.S. Reason Against Intervening in Syria: “White House press secretary Jay Carney announced (7/24/12), “The U.S. is not going to intervene the Syrian situation in a military way or to invade the territory of this country, President Barack Obama believes that such actions would be wrong, he said, commenting on Republican senator John McCain’s statement that Washington does not exert efforts for the resolution of inter-Syrian conflict.” Jay Carney mentioned nothing about saving Syrian lives. As of this writing (10/31/12), 36,000 Syrians have been killed in the civil war.

U.S. Reason for Intervening in Libya: During a joint press conference (5/25/11) with British Prime Minister, David Cameron, President Barack Obama justified support for Libyan rebels in their struggle to overthrow dictator Muammar Gaddafi. “Well, first of all, I do think that we’ve made enormous progress in Libya.  We have saved lives as a consequence of our concerted actions…The goal is to make sure that the Libyan people can make a determination about how they want to proceed, and that they’ll be finally free of 40 years of tyranny…We have a broad range of partners under an international mandate designed to save lives and ensure that we did not have the sort of massacre that would lead us then to look back and say to ourselves, why did we stand by and do nothing.”  There are widely varying estimates of the number killed during the military intervention by the west in Libya during 2011. “On September 8, Naji Barakat, the Health Minister of the National Transitional Council, stated that about 30,000 people were killed during the war.”

None of these declarations by President Obama and other western leaders mentioned the single most important reason for intervening in Libya and not Syria. Libya has nearly 20 times more proved oil reserves than Syria:

Country                                Proved Oil Reserves (billion barrels)

Libya                                             46.0

Syria                                                2.5

Conclusions: The Libyan and Syrian conflicts are civil wars and nearly the same fatalities have resulted from them so far. Based on these two examples, one has to wonder whether foreign intervention in a civil war actually saves lives, as claimed by President Obama in his justification for Libyan intervention.  This writer believes that the real reason for intervention justification is based on whether a country, engaged in civil strife, has significant oil reserves of importance to the west. If Libyan oil were removed from the world market, oil prices probably would have risen drastically, despite Saudi Arabian or Russian attempts to make up for any Libyan shortfall.

Germany is highly dependent upon Russia for crude oil imports, namely 40 percent. Germany also imported 14.1% of its oil from Norway and 10.7% from Great Britain. All together, Germany imports 93 percent of its oil from all sources.

Here is a graph of impressive Russian oil production:

In contrast, the graph below depicts Norwegian oil production approaching its sunset:

There is a similar plot for the UK.

Conclusion: Germany imports nearly 25 percent of its oil from two declining sources, namely the UK and Norway, in contrast to 40 percent from Russia, which shows increasing oil production and large volume. It is an irony of history that Germany imports 65 percent of its oil from three of its former WWII adversaries. Unless Germany can develop renewable energies on a huge, commercial, affordable scale, it will become subservient to Russia, a result that would have pleased Joseph Stalin.

Die Weltgeschichte ist auch die Summe dessen, was vermeidbar gewesen wäre. (The history of the world is also the sum of what might have been avoided). – Konrad Adenauer (1876-1967), West Germany’s first chancellor

The Energy Information Agency (EIA) of the Department of Energy (DOE) recently reported increased oil production from the Bakken formation, an area of about 200,000 square miles located in Williston Basin found in parts of North Dakota, Montana and Saskatchewan. “North Dakota’s oil production averaged 660 thousand barrels per day (bbl/d) in June 2012, up 3% from the previous month and 71% over June 2011 volumes.” The graph below shows North Dakota oil production from the Bakken formation from January 2005 to May 2012.

According to the Oil & Gas Journal, “A conservative estimate of oil in place in the Bakken is 300 billion barrels, but it is locked in low permeability rock. Continental Resources Inc. places the quantity of recoverable oil in the US Bakken at as much as 24.3 billion barrels. Horizontal drilling and hydrofracturing make commercial scale oil production possible.”

There are dozens of operating companies located in the Bakken region. Some of these include Conoco Phillips, Encana Corporation, Gulf Port Energy Corporation, Hess Corporation, and Marathon Oil Corporation. Recently, ExxonMobil became a player with a payment of $1.6B in cash for Denbury Resources’ Williston Basin assets.

Statoil, a state-owned Norwegian company, is a major Bakken player with the expectation of producing 500,000 barrels of oil equivalent by 2020. “The majority of the increases in North America will come from U.S. operations focused in the Marcellus, Eagle Ford and Bakken shale plays,” said Bill Maloney, president of Statoil North America. Statoil has augmented its activity by leasing 1,000 railroad cars to relieve the oil transport bottleneck from North Dakota due to insufficient pipeline capacity.

North American oil plays are renewing Statoil’s declining oil reserves in the North Sea. The following graph illustrates the fact that Norway reached peal oil production in the late 1990s with declining production ever since that time.

The presence of Statoil has caused scant notice by the mainline news media. Would this have been the case if a Chinese company were producing oil in the United States?

Conclusion: One day, the oil production curve for the Bakken reservoir will resemble the declining Norwegian oil production curve.  The many Bakken oil-producing companies will then rush to the next great discovery to feed an energy gluttonous society. This way of doing business is not sustainable.

In the Boston Globe (10/12/2012), Congressman Ed Markey noted that gasoline prices are increasing (8 percent), while crude oil prices have declined (7 percent) during the past four weeks.  He wants the Federal Trade Commission to determine whether price gouging can account for increasing gasoline prices.

The U.S. Department of Energy attempted to assure motorists that the price of gasoline and its export were unrelated (i.e., the law of supply and demand does not apply in this case). “The growth in U.S. gasoline exports does not necessarily mean higher pump prices for U.S. consumers. Rather, export markets are providing an outlet for refiners that might otherwise have faced lower profit margins that could encourage them to reduce output or possibly even shutdown, which could cause gasoline prices to increase.”

The graph below depicts U.S. exports of finished gasoline to the world market. Notice that from the early 1960s until the early 1980s there was practically no export of gasoline. The export curve began to ramp up from around 1988 and then flattened from the mid 1990s until 2008, where it increased nearly exponentially up to present time.

All U.S. exports of finished gasoline

Fifty eight percent of U.S. finished gasoline exports are delivered to Mexico. It is noteworthy that 78 percent of all gasoline imports to Mexico are from the United States. Thus, Mexico is highly dependent upon its neighbor for finished motor gasoline, most notably due to a 77 million-barrel/day shortfall of Mexican production.

This dependency on gasoline from the United States is due in great measure to the starkly declining Mexican proved reserves as indicated by the following graph. Notice that Mexican crude oil reserves peaked around 1990 at nearly 55 billion barrels and have declined to about 10 billion barrels at 2011.

Mexican proved crude oil reserves

Conclusion: Petroleum products are traded on the world market. Energy companies will always seek the best price, either at home or abroad for their products.  Ever increasing exports of finished motor gasoline will decrease supply at home and cause price increases. Consequently, conservation of fossil fuels (i.e., a non renewable resource) will never happen in the United States based on business as usual (i.e., ever increasing sales to satisfy share holder desire for even greater profits).