The Oil Casino: SEC Heading for Monte Carlo, Part II

 |  Includes: BP, CGG, HAL, PBR
by: Retired User

<< Go Back to Part I
Before we look at miscellaneous minnows pretending to be giants, let's talk about the Cornucopia of Ultimately Recoverable Global Oil Endowment -- not a single syllable of which refers to physical reality or prudent use of money. It's merely another Monte Carlo black box prestidigitation. But that doesn't stop well-groomed industry cheerleaders from bullshitting The Wall Street Journal.

The 21st century is very likely to overflow with oil. And since we don't know the total amount of oil resources existing underground, it's impossible to calculate the curve of future supply... The inadequate data we rely on today are from the U.S. Geological Survey, and put the stock of conventional oil resources at least seven to eight trillion barrels. More than two trillion of these are currently deemed to be recoverable, while "proven" reserves are around 1.2 trillion barrels... Yet, the concept of resources and reserves is dynamic. Throughout history, new exploration and the development of new technologies have allowed [us] to discover new oil frontiers and to develop them. What's more, the U.S. Geological Survey's figures may well be underestimated. In spite of the one trillion barrels of oil that we have already consumed, the total available reserves continues to grow... by 2030, more than 50% of the known oil will be recoverable. At the same time, the amount of known oil will have significantly grown by then, and a larger portion of unconventional oils will be commonly produced, bringing the total amount of recoverable oil reserves to something between 4.5 - 5 trillion barrels. What's more, a significant part of "new" reserves will come from the ability to better exploit what we already have. [Leonardo Maugeri]

Maugeri is a career academic and head of strategy at Eni, the Italian oil monopoly 30% owned by the Italian government. For the past eight years, Eni was nominal operator of the stalled, triple-over-budget Kashagan project, which the Kazakh government plans to expropriate when Eni steps aside and Shell engineers start to produce oil, maybe in 2012.
We tried to work with Eni's technical people twice. I wouldn't ask Eni to lead me out of a bathroom.
Okay, calmly and rationally, let's review what USGS actually said about their Monte Carlo-based 2000 Assessment of worldwide ultimately recoverable oil reserves.

Since we are now 40% of the way through the USGS assessment period (1995-2025), some evaluation of the accuracy of the assessment can be made. But it is important to recognise that the study did not predict what would actually be found in 30 years, but instead estimated what could potentially be found using existing technology... Assuming a constant discovery rate, a total of 173 billion barrels should have been discovered by 2003. Real-world oil discoveries outside the US were less than half of what was expected over this period... IEA (2008) reports a fall in the average number of fields discovered per year since 1996 as well as the average size of those fields. [see Supporting Data]

Hey, real-world failure is no excuse, right?

Peak Scenario 2200 is constructed on a 7,792-Gb URR platform that spans over four centuries. Six of All Liquids seven main components will have exhausted presently-economic resource by Year 2344. [Freddie Hutter]

Now Let's Talk Sense
Here's a chart from Matt Simmons, summarizing new proved reserves worldwide decade by decade. Big discoveries were made a generation ago.

New exploration and production does not obey Moore's Law. It's a capital intensive industrial challenge, wrestling with hundreds of tons of iron pipe, physically drilling through solid rock deeper than ever before, from a billion-dollar floating skyscraper, to develop and exploit progressively smaller oil fields.
BP's (NYSE:BP) Thunder Horse project is considered a success, a benchmark of best practice. Amoco geologists did a great job of identifying known sands under a salt overhang in U.S. waters, where the rule of law and existing pipeline infrastructure squash risk. The platform was delivered on time, on budget. Then the problems began.

BP's $3 billion project became a $5 billion nightmare, requiring an heroic subsea refit, but happily Thunder Horse is now producing 300,000 b/d. Payback on exploration expense and floater/subsea capex will be three years. They have 1 billion barrels of proved reserves.
BP invested $5 per barrel of proved reserves.
This is extremely important. Dead-certain payback in U.S. waters with enforceable property rights, oil and gas pipelines nearby, assured market, plenty of engineering back-up and skilled workforce in Houston with bulletproof BP-Amoco geoscience justified $5 per barrel upfront to tap honestly proved reserves. No bribery or patsies required. No third party project finance, Ex-Im guarantee, or long term leasing.

As we tour the world, basin to basin, looking for recoverable reserves, please keep that in mind. Very low risk $5 per barrel capex in the U.S. Gulf of Mexico.
Western Siberia
USGS priority rank #1

The West Siberian basin is the largest petroleum basin in the world, covering an area of about 2.2 million km 2. Three total petroleum systems are identified. Discovered hydrocarbons in these systems are 144 billion barrels of oil and more than 1,300 trillion cubic feet of gas. Extremely high political and legal risk. Russian gangsters. Corrupt local law enforcement. Resource nationalism. Export duty is currently $38 a barrel. Western staff can be deported summarily. Must employ Russian managers, accountants, rig workers. No infrastructure unless you partner with Gazprom. Sales go through a broker controlled by Vladimir Putin.

Mespotamian Foredeep
USGS priority rank #2

Comprises Iraq, Kuwait, and the Saudi Neutral Zone. P2 assessment 140 billion barrels undiscovered. Other estimates: 140 billion barrels "proved" plus 50 billion potential in tertiary recovery. Extremely high political and legal risk. Insurgent and terrorist activity in Iraq. Western oil companies only allowed to bring in a small number of managers and technical staff. Resource nationalism. Petty bribery and corruption commonplace. Contracts can be voided. Must employ Iraqi managers, workers. Islamic prayers interrupt work. Western operators never received a penny for the oil they produced under Kurdish licenses, which Baghdad says are illegal.

Arctic Ocean
new USGS rank #2

BP's Monte Carlo guesswork: 200 billion boe. Russia thinks its continental shelf covers half of the Arctic Ocean, including the North Pole. Thick ice cap, icebergs, wildlife. No infrastructure possible. No feasible production systems. Limited exploration season. CGGVeritas (CGV), the world’s largest seismic surveyor, shooting Beaufort Sea off Canada’s northern coast. Northern part of the Barents Sea in waters around Svalbard island group are claimed by Norway. Maps, details. It is conceivable that UK-Canadian and Norwegian companies will attempt wildcat exploration.

Greater Ghawar Uplift
USGS priority #3

Saudi government crown jewel. No foreign investment allowed. Western contractors do the engineering of secondary recovery. 95% water cut. USGS thinks remaining P1 reserves may be as little as 5 billion barrels. Saudis have awarded Halliburton (NYSE:HAL) "turn-key" rehabilitation of Ghawar and started 3D seismic survey of Empty Quarter which is likely indeed empty. Maps and discussion at The Oil Drum.

Zagros Fold Belt
USGS priority #4

Comprises Iran, Persian Gulf waters, Qatar, Kuwait, Basra, Baghdad and Mosel in younger formations. P2 assessment is 40 billion barrels undiscovered heavy oil and 180 trillion cubic feet of gas. LNG projects, pipeline work, war risk, U.S. embargo.

Rub Al Kali Basin
USGS priority #5

U.A.E. and Northern Oman, about 80 billion barrels 400 tcf

(...boy, this is boring. Are we ever going to get out of the Middle East?...)

Sure, we'd all like to get out of the Middle East, screw Opec, bring the troops home and declare energy independence with windmills and solar panels. Unfortunately, wishes are not horses and OECD industry collapses without liquid horsepower.

What we really need is a Magic Bullet, a Disneyland E-ticket, a game changing "super-elephant" that USGS missed. Not heavy Orinoco crud. Not Canadian tar.
Monte Carlo Mello Drama
If you like P2 "more probable than not," you'll love Marcio Mello, the Brazillian oil geologist who wowed ASPO Denver with (wait for it, drum roll) 500 billion barrels of recoverable light crude in the ultradeep pre-salt, most of it in Mello's back yard.

If something seems too good to be true (Bernie Madoff's consistent above-market returns, or AAA sub-prime and Alt-A liar loans), maybe some red flags should go up. Mello's 500 billion barrels of recoverable oil is ten times more than Brazilian energy minister and chief cheerleader Edison Lobão ever dared to dream.

Brazil will have crude for half a century and become a leading oil exporter and "an important player in international geopolitics," the country's energy minister said Wednesday during a congressional hearing. Edison Lobão said that thanks to the vast potential of its pre-salt region, Brazil could produce some 3.8 million barrels per day, double its current output. [Oil Online]

That seems reasonable, right? -- double Brazil's current production over the next 10 years. Especially when it's backstopped by the world's leading deepwater experts, 15 pre-salt discoveries, and 300,000 pre-salt barrels already lifted and refined. Brazilian and Chinese governments, U.S. Ex-Im Bank, and private investors will give Petrobras (NYSE:PBR) whatever funding they need to haul up those 50+ billion barrels.

It would be unprofessional and preposterous to fart on a fairytale happy ending. New SEC rules are blinking bright green, allowing PBR to book whatever they want. Proved schmoved. Who cares if it's 300 km offshore and Exxon had a dry hole?

Horizontal drilling and hydraulic fracturing are being considered by Petrobras. Tupi reservoir rocks may be similar to the Toca carbonates of the Lower Cretaceous (Barremian-Aptian) Bucomazi Formation in West Africa. At the Kambala Field in Cabinda, Angola, Toca reservoirs are 75 to 300 ft thick and consist of partially to fully dolomitized carbonates that have matrix porosities of 2-10% and very low permeability. At Kambala, production is controlled by faulting and fracturing and, while the field contains more than 1 billion bbl of oil in place, cumulative production after 30 years is less than 50 million bbl. [Arthur Berman, quoted here]

(Omg r u 4 real? geology is like so not sec dot 2 dude)

Continue on to Part III >>

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