Industry Taskforce on Peak Oil & Energy Security
Peak Oil
Implications of the Gulf of Mexico oil spill
November 2010
Briefing Note on Deepwater Oil Production
The Gulf of Mexico oil spill resulting from the deepwater offshore production will account for
blowout on April 20th brought the Macondo 29% of new oil supplies by 2015. In this context,
deepwater oil field, beneath 5,000ft (1,500m) of deepwater production is vital to secure the new
water, to the world’s attention. The loss of the supply that is required to maintain a reasonable
Macondo field, after it was successfully capped, cushion between worldwide supply and
is inconsequential in terms of its potential to worldwide demand. Therefore, any delays as a
deliver oil to the world markets. Indeed, result of the Gulf of Mexico oil spill have
deepwater reserves could easily be dismissed potentially serious consequences leading to
as “insignificant within the total supply picture”, spare capacity falls and oil price rises.
a view that could lead to the conclusion that
deepwater oil is “not worth the risk involved in We are running out of time to implement the
production”. necessary measures to both protect the UK
economy from the threat of peak oil production,
Nonetheless, this oversimplifies the real picture. and make the necessary switch to more
Forecasting forward five years, it is clear that if sustainable energy sources.
we are to meet global demand for oil then
1 Introduction
This briefing note is issued by the Prompted by the much-publicised
UK Industry Taskforce on Peak Oil deepwater Macondo oil spill
and Energy Security (ITPOES). The in the Gulf of Mexico, ITPOES
interpretation of the current position, commissioned analysis into the
and viewpoints expressed in this proportion of deepwater offshore
briefing, are those of the ITPOES production units within total new
members – a group of private British capacity due to come on stream.
companies whose interests span This note seeks to highlight issues
a wide range of business sectors. arising from the Macondo spill as
This work, therefore, represents an seen by the Taskforce, which are
independent, business-oriented, view likely to confront the UK within the
of the national position. next five years.
ITPOES | Briefing Note on Deepwater Production November 2010
2. Previous Taskforce reports It is clear to Taskforce members an OPEC phenomenon as all other
that when the world reaches the producers aim to operate flat out,
Report 2 from the Taskforce was maximum oil extraction rate, the within operational constraints, to
launched in February 2010. It drew era of cheap oil will be behind us. In maximise their revenues. In contrast
upon the invited opinion piece by the new era, oil prices are likely to OPEC uses spare capacity to defend
Chris Skrebowski, a recognised be higher and more volatile, and oil prices.
independent oil-industry expert. price shocks will have the potential
While oil supply is ultimately derived to destabilise economic, political and The Taskforce agrees with
from below-ground resources, social activity. Skrebowski that incremental new
Skrebowski highlights above-ground supply capacity over the next few
aspects of production that might The economic crash that occurred years is predictable owing to the
impact supply. He examined in detail between the two Taskforce reports slow-moving nature of oil supply
the evidence which defines global has done little to allay our concerns. and the long lead times for major oil
oil reserves and extraction rates, The time until a peak in global projects. Increases in oil supply, up to
and concluded that the global peak production was little impacted as six years hence, are largely dictated
production rate for oil is likely to cancelled new capacity broadly offset by the long lead times for major
occur within the next decade. The recession-deferred demand. When projects, so an analysis of these
conclusions drawn supported those combined with demand projections, projects gives high confidence to a
reached in ITPOES’ Report 1 from we still projected a price crunch calculation of the maximum supply-
October 2008. It was clear that the would take place following the peak. side capacity. This ‘megaprojects’
fundamental issues identified in analysis collates in future annual
Report 1 remain unchanged, namely: Following the attention drawn to the time bands all projects with a peak
issues of deepwater drilling by the flow of 40,000b/d or greater. The
• The net flow-rate data shows Macondo well, the Taskforce has primary risk in this analysis is from
that increases in extraction will be extended its analysis to examine supply shortfalls caused by project
slowing down in 2011-13. the deep offshore component. This delays over and above those already
• The oil industry is not discovering briefing note summarises this work announced.
more giant fields at a sufficient and the conclusions drawn.
rate. It is notable that there are very few
3. Incremental new capacity oil projects in water depths of up to
• There are concerns about
1,000ft (300m). This means most
the levels of reserves quoted
The basis of our analysis of above- offshore projects are now deepwater,
by the Organisation of the
ground conditions is summarised as in more than 1,000ft of water, well
Petroleum Exporting Countries
follows. beyond the 500ft (170m) maximum
(OPEC), which are critical to the
depth for divers so rely much more
confidence levels associated with
The recent data on historical on remote-operated vehicles.
future production capacity.
production, as provided by the 500ft is the cut-off that has been
• There are indications that under-
Energy Information Administration used to define deepwater offshore
investment in the oil industry
(EIA), is 86.2Mb/d (million barrels projects for the data presented
over the past decade has led to
per day) for May 2010 (see Figure here. Deepwater projects make up
infrastructure problems and skill
2 lower line on left). The historical an increasing proportion of future
shortages that will make it difficult
production capacity cap can be capacity for both OPEC (essentially
to increase production capacity
derived by adding spare capacity, Angola and Nigeria) and for non-
rapidly in the short-term.
currently about 3.3Mb/d, to the OPEC (predominantly Brazil and
historical production data giving the Gulf of Mexico). Planned new
89.5MB/d (see Figure 2 upper line capacity for 2010 was 0.4Mb/d for
on left). It is important to note here OPEC and 1.0Mb/d for non-OPEC
that spare capacity is essentially (see Figure 1(a)). Adding six years
November 2010 ITPOES | Briefing Note on Deepwater Production
of incremental data together gives where consumption data is rather
planned new deepwater capacity by less reliable than for the OECD. The
2015 of 8.9Mb/d. Taskforce has looked at the IEA’s
recent Medium Term Oil and Gas
Report of June 2010. In this the
When the megaprojects as a IEA projects a band of global oil
whole were assessed in 2009 for demand to 2015 between a high
Report 2, there were a number of limit of 92.0Mb/d and a low limit of
projects which had been cancelled, 89.5Mb/d (see Figure 2 lower lines).
delayed or were awaiting a decision.
Reviewing these megaprojects now, However, Report 2 of the Taskforce
it is evident that greater confidence postulated strong growth in global
in economic recovery during 2010 demand from non-OECD countries. Figure 1(a) Analysis of future annual gross new
has led to their reinstatement and This suggested world demand capacity from the megaprojects analysis
the decision to go ahead. This is in 2050 could be in the region of
reflected in higher overall annual 180Mb/d. Working backwards from
increments compared to Report 2 this, we might expect demand levels
(see Figure 1(a)). Adding six years to exceed 120Mb/d in 2030. This
of incremental data together gives trajectory is the top line in Figure 2
gross additional capacity by 2015 which exceeds 95Mb/d by 2015.
of 30.9Mb/d. Of this, deep offshore
contributing 8.9Mb/d corresponds to From this analysis of demand, spare
29% of the total. capacity in 2015 against the IEA high
demand would be about 3Mb/d,
Whilst the megaprojects add new while for the ITPOES strong growth
capacity, existing production capacity postulation this shrinks to zero (in
is declining. Most authorities estimate Figure 2). We return to this aspect in
Figure 1(b) Analysis of future annual gross new
the reduction in achievable extraction our conclusion below. capacity with an average six-month delay
rates, referred to as depletion, at applied just to future deepwater projects.
around 4.5%/y. Looking at the six-
year period to 2015, overall loss of
capacity would amount to 25.4Mb/d
on this basis. Therefore, the gross
new capacity of 30.9Mb/d by 2015
is reduced by depletion to a net new
capacity of 5.5Mb/d. Thus the future
production capacity cap by 2015 can
be estimated as 95Mb/d (see Figure
2 upper line).
Analysing the demand side to 2015
is rather less predictable than for
production capacity as the path
of economic recovery since the
recession of 2008 is uncertain.
Also 80 to 90% of future demand is
Figure 2 Analysis of global oil production and production capacity cap for the historical since 2005 and
expected to come from non-OECD projected to 2015. The projection of the future cap on capacity is based on gross new capacity in
countries, such as China and India, Figure 1 less annual depletion of 4.5% with and without a six-month delay to deepwater production.
ITPOES | Briefing Note on Deepwater Production November 2010
Industry Taskforce on Peak Oil & Energy Security
For more information
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4. Implications of Macondo test the impact of an average six- offshore. However, the Taskforce
month delay to future deepwater draws no comfort from this value of
Our analysis that deepwater oil flows. We have repeated our analysis spare capacity:
projects will constitute 29% of with a six-month delay applied to the
new capacity by 2015 (see Figure deepwater component (see Figure • There are suggestions that up to
1(a)) shows their significance, not 1(b)) resulting in 8.1Mb/d by 2015. 2Mb/d of OPEC spare capacity
previously evident. may be theoretical, inoperable or
Now the total new gross capacity by
2015 is 30.1Mb/d. Depletion remains unsaleable.
The Macondo well was planned to
produce about 0.05Mb/d in 2012. unchanged so the net new capacity • Our strong growth postulation
This would have accounted for by 2015 is 4.7Mb/d, a significant suggests that all production
under 0.2% of the total overall new reduction from 5.5Mb/d without would be needed by 2015.
production to 2015. The loss of the delay. The expected production
this output is of little significance, capacity cap in 2015 would be nearer • The depletion figure of 4.5% of
particularly given the uncertainties 94Mb/d (see Figure 2) with spare existing production capacity could
around the figures. capacity with respect to the IEA’s high be on the low side.
demand reduced to nearer 2Mb/d,
However, the effects of BP’s nearly one third less. The Taskforce sees very major
problems at the Macondo well have consequences of rising oil prices
introduced a wider issue. The real 5. Conclusion in the next few years. Without a
impact of Macondo may be from strong and coordinated response
the impact of project delays as a Our analysis of the effects of from Government to protect the
result of new legislation, tighter an average six-month delay to UK economy and society from
controls or more inspections of deepwater projects suggests a rising prices, we will see the cost
deepwater installations. While it reduction in future spare capacity of travel, food, heating and retail
may be reasonable to conclude that from 3 to 2Mb/d by 2015 with goods rise which will impact British
Macondo will increase deepwater respect to the IEA’s project high businesses and citizens alike. We
drilling and development costs and demand (see Figure 2). This also need to see much quicker action
delay projects, as yet there is no way highlights to us the consequences from Government to support the
to quantify this. We can, however, of moving to difficult oil from deep introduction of renewable energy
technology and energy efficiency
measures.
The Taskforce would like to work
with the Government to develop a
contingency plan that both addresses
the risks of Peak Oil and speeds
up our transition to a low-carbon
economy.
November 2010 ITPOES | Briefing Note on Deepwater Production