Tuesday, June 7, 2016

The Seneca Cliff of Oil Production





The concept of the "Seneca Cliff" seems to have gone mainstream. Below, it is mentioned in a recent post by Dennis Coyne on "peakoilbarrell" as an obvious concept. Just as when you say "Gaussian Curve", you don't have to specify what shape the curve has, so it is for the "Seneca Curve". It looks like I started some kind of avalanche with my 2011 post when I introduced the term. See also my blog wholly dedicated to the subject.

Here, the projections by AEO (annual energy outlook) seem to me very optimistic; can production really keep growing until 2035-2040? If that were to happen, however, the subsequent collapse would be truly abrupt.

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EIA’s Annual Energy Outlook and the Seneca Cliff


blogchart/
The scenario above shows an Oil Shock Model with a URR of 3600 Gb and EIA data from 1970 to 2015 and the Annual Energy Outlook (AEO) 2016 early release reference projection from 2016 to 2040. The oil shock model was originally developed by Webhubbletelescope and presented at his blog Mobjectivist and in a free book The Oil Conundrum.
The World extraction rate from producing reserves must rise to 15% in 2040 to accomplish this for this “high” URR scenario. This high scenario is 100 Gb lower than my earlier high scenario because I reduced my estimate of extra heavy oil URR (API gravity<10) to 500 Gb. The annual decline rate rises to 5% from 2043 to 2047 creating a “Seneca cliff”, the decline rate is reduced to 2% by 2060.
blogchart/
The scenario presented above uses BP’s Energy Outlook 2035, published in Feb 2016. This outlook does not extend to 2040, maximum output is 88 Mb/d in 2035 at the end of the scenario. This scenario is still optimistic, but is more reasonable than the EIA AEO 2016. Extraction rates rise to 10.6% and the annual decline rate rises to 2.5% in 2042 and is reduced to under 2% by 2053.

2 comments:

  1. Dear Ugo, thanks god everyone recognises a cliff once he reaches the edge!
    I agree with you that the outlook of that chart looks too optimistic in the growing phase, and maybe too sharp in the declining one.

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  2. A comment received from Roger Baker

    A plausible Seneca collapse scenario is to be found in Berman's recent work. Just its title about saving the oil industry sounds scary:



    "Returning To Market Balance: How High Must Prices Be To Save The Oil Industry?"

    (These are Berman's bullet points, lifted from page 2)

    "The weak global economy will be an important check on price recovery.

    Data suggests that oil producers need prices in the $70-80 range to survive.

    That is unlikely in the next year or so.

    If a weakened world economy cannot support those prices, we may see supply dwindle in a few years to levels that cause price spikes that cannot be absorbed.

    Without timely price relief, the future looks grim for an industry on life support."

    This all seems reasonable to me. If anyone would know the price needed to sustain profitable global production, it is probably Berman. Anyone following the oil economy would expect the demise of a big part of shale drilling and a sharp decline in production elsewhere like the Canadian tar sands, which would hurt the industry, disperse the workers, and make a reboundy of the industry slow and painful.

    US quantitative easing led to low interest credit, which led to a a shale drilling asset bubble. Most global oil sellers, including the Saudis and Iran, including the US shale oil producers who upset the delicate global market balance, are now compelled to sell into this depressed and structurally inelastic market. A market which is subject to big price swings, as the result of a few million barrels of change in an oil economy characterized by rigid supply and rigid demand.

    There have now been two years of greatly contracting investment in production. And it looks like the global economy is headed into a deflationary spiral, which is bad for investment as Gail Tverberg has described repeatedly on her "Our Finite World" blog. It is hard to find much near-term basis for a consumer-led recovery after the end of centuries of exponential growth based on cheap energy, which our expansionist system of finance capital system needs to function normally.

    David Stockman is a pretty good economic analyst, despite his coming out of a Ronald Reagan administration that was thoroughly devoted to perpetuating business as usual.



    It’s Not Random — The Global Economy’s At Stall Speed, Rapidly Loosing Lift


    This predicted slump would delay the return of enough aggregate demand to get world demand high enough to make new production investment profitable. Even during a world depression, the world as we know it requires a certain amount of oil to function normally, after we burn through the cheap oil reserves in a year or two. This sets the stage for another painful price spike and more demand destruction.

    How can a capitalist market economy based on reliable cheap energy function under these chaotic conditions? Berman lays out the threat convincingly. It is hard to imagine a realistic economic scenario that would avoid this chain of events.

    -- Roger Baker

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Who

Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)