The run-up in oil prices from 2005 to 2008 set the stage for today's good news: a vast unconventional resource base now being produced in the US In an excerpt from his new book, Following Oil, Thomas A. Petrie gives his perspective on peak oil theory: To his way of thinking, we're not running out of oil anytime soon.

M. King Hubbert died in 1989, but his pioneering analyses of peak oil events [when oil production in a given area peaks] have continued to be pursued. Given the public attention generated by his original forecast about the timing of conventional US peak oil, numerous Hubbert disciples took on the challenges of analyzing the prospect for and timing of peak oil production in other basins and countries around the world. Among others, these include Colin Campbell (an oil consultant), Ken Deffeyes (Princeton professor), Chris S. Skrebowski (editor of Petroleum Review), Richard Heinberg (peak oil author), Jean Laherrere (oil company geophysicist), David Goodstein (vice chancellor at Cal Tech), Thierry DesMarest (honorary chairman of Total), and the late Matt Simmons (energy investment banker).

From 2000 to 2005, their collective work began to gain wider public attention. In the same period, UK and Norwegian North Sea oil production, in fact, did peak, essentially as predicted, after only three decades of aggressive exploration and development. This focus was further reinforced as the list of other countries experiencing declining production continued to lengthen. By 2005, well over one-half of the world's producing countries had entered what appeared to be irreversible natural declines in conventional oil output.

Excerpted from Following Oil by Thomas A. Petrie. Copyright 2013, University of Oklahoma Press. A second excerpt will appear in the February issue of Oil and Gas Investor.

The onset of peak oil does not mean that we will be running out of oil in the short term, the medium term, or even the relatively longer term. In all likelihood, at least one-half century after the onset of global peak oil, there will still be significant production of oil. What peak oil does mean is that in the aggregate, a point will ultimately be reached at which new additions to the conventional global oil production base are insufficient to offset the annual decline in production from the planet's more-mature existing fields.

The timing of that event is probably being pushed out somewhat further than generally expected, because some of the same horizontal drilling technologies that are unlocking unconventional oil resources are now also beginning to be used in a variety of conventional oil fields, with encouraging performance. At a minimum, the widening application of such techniques seems likely to significantly moderate the rate of natural decline even in existing conventional oil and gas reservoirs.

Within the petroleum industry itself, the debate about global peak oil continues to be controversial, with both advocates of its inevitable occurrence and proponents of its ongoing defer-ability. The former observers base much of their case on the decided change in character, size, quality, and location of new conventional oilfield discoveries that have been made around the globe over the past four or so decades. This pattern stands in sharp contrast to earlier periods, such as the 1960s and 1970s, in which there were many giant discoveries.

In contrast, the optimistic observers argue that shortfalls in reserve additions are largely due to progressively more limited access to prospective acreage. They are convinced that new discoveries, and new extraction technologies, in particular, could unlock the much-expanded potential of unconventional oil resources. Such developments afford the prospect to significantly change the outlook for future production. This is especially the case if restrictions on access to prospective acreage are reduced or eliminated.

As often occurs in such debates involving global trends, there is some truth to both arguments. There has been an ongoing tendency toward much more restricted access to attractive acreage. This pattern began in the 1970s as the OPEC nations began to exert greater sovereignty over their oil development policy. During the course of that decade, the rules of the game (indeed, the actual reserve ownership) changed dramatically for Western oil companies operating in the major exporting countries of the Middle East, Africa, South America, and Asia. This process is described in Anthony Sampson's book, The Seven Sisters, published in 1975. The subsequent full playing out of geopolitical trends is even more comprehensively detailed in Daniel Yergin's Pulitzer Prize–winning volume, The Prize: The Epic Search for Oil, Money and Power. Both volumes have depicted critical historical events in the realignment of geopolitical and oil-pricing power.

With the benefit of today's hindsight, it is clear that one important effect of this power shift was to incentivize the world's major oil-exporting countries to push their resource planning and exploitation horizons out over multiple decades. In fact, in the case of the relatively few major exporting countries where the option was feasible, it involved taking as much as a 50-to-100-year time perspective. This entailed restricting access to new exploratory concessions and slowing development to ensure a more constrained balance of oil supply with demand.

Moreover, increasingly limited access to oil-prospective acreage has not been confined to areas involving the OPEC concessions. In the non-OPEC world, opposition from a variety of sources because of environmental issues and other technical concerns has reduced the scope of opportunity to explore for new fields and bring production to market on a timely basis. This has been especially the case in the frontier regions of the US and Canadian Arctic as well as offshore from both coasts of the US Even in the Gulf of Mexico, parts of the eastern Gulf have been largely off-limits for many years. In recent years, this restrictiveness was beginning to change toward somewhat better access. However, there remained ongoing restrictions given the sensitivity of Florida's panhandle and coastal residents and property owners. In the aftermath of the Macondo disaster of 2010, it is difficult to be very optimistic about how much additional constructive change there will be versus the current resistance to offshore development. The same attitude is becoming increasingly prevalent concerning portions of onshore federal lands under the control of the Bureau of Land Management and the Department of the Interior. Furthermore, the types of environmen-

“In all likelihood, at least one-half century after the onset of global peak oil, there will still be significant production of oil.”

Thomas A. Petrie, CFA, is chairman of Petrie Partners LLC, in Denver. He formerly served as vice chairman of Bank of America/Merrill Lynch and was vice chairman of Merrill Lynch until its acquisition by Bank of America in 2009. Petrie co-founded Petrie ParkmanCo., a Denver- and Houston-based energy investment banking firm that merged with Merrill Lynch in 2006. Petrie graduated from the US Military Academy at West Point and earned an MSBA (Finance) from Boston University. The Colorado School of Mines has bestowed on him an honorary doctorate of engineering.

tal opposition commonly demonstrated in the US are showing up elsewhere around the world.

'Practical peak oil'

While improved access to prospective acreage might mitigate the onset of global peak oil, the longer-term magnitude of such benefits is not yet fully determinable. In any case, with regard to conventional oil-producing reservoirs, I believe that in view of the lead times involved to develop alternative energy supplies, we still need to consider the implications of an eventual peaking in global conventional oil supplies. I have termed this “practical peak oil” and based this conclusion on several key assumptions and judgments.

First, while access to prospective land may improve somewhat, it is unlikely to become a large enough factor to qualify as a game-changer. Second, various analyses indicate that the embedded annual decline rate in the existing global producing base appears to be in the range of 3% to 5% per year. This means that at current production levels, new field output on the order of 2.6 million to 4.4 million barrels per day is required annually simply to hold production flat. Achieving the high end of this range is a tall order. Such an achievement could be possible for several additional years, especially if the current optimism about new Iraqi production growth comes to pass and also if Saudi Arabia remains both politically stable and willing to expand its production at least moderately.

Somewhat more optimistic views articulated by the reservoir consultant Core Lab and Daniel Yergin would suggest that 2.5% to 3% may prove to be the embedded global decline rate for the next decade or so. This could lower the annual production replacement requirement to a more manageable level, perhaps comfortably under 3 million barrels per day. In sum, these possibilities suggest the likelihood of a period of “plateau oil” before the actual onset of irreversible global production decline from conventional oil fields.

Global oil and related liquids production hit an interim peak of almost 87 million barrels per day in 2007 just prior to the global great recession triggered by the financial meltdown of 2008. Impaired economic growth worldwide resulted in a rather temporary decline of 3 million barrels per day in global oil demand. That setback has now been erased as the recovery in emerging markets has regained a degree of momentum.

In the view of some observers with whom I agree, whether the world production case can accommodate sustainable growth in daily oil output much above 95 million to 100 million barrels is unclear. Recent progress in Iraq, as well as planned expansions of oil production in the United Arab Emirates, Kuwait, and a few other exporting countries, may imply that such a view is somewhat too cautious.

However, as news headlines periodically underscore, the nongeologic and other, security-related obstacles to achieving the Iraqi promise remain formidable. Moreover, even if these planned new additions are brought on in a manner that essentially offsets embedded declines in the established producing base, global growth in demand for oil could still ultimately outrun additions to global production capacity sometime in the next decade. At that point, it appears likely that oil price levels will need to rise further to ration available supply as well as provide financial incentives for developing more-expensive unconventional and renewable energy sources.

Finally, these are the conditions likely to enable sufficient development globally of unconventional oil resources to generate a most helpful extended period of “near plateau oil” as an important mitigating factor regarding the peaking of conventional global oil production.

As attention getting as M. King Hubbert's 1956 prediction proved to be, perhaps his even more noteworthy insight for those of us dealing with today's issues and trends is contained in his challenge implicit in the following statement: “Our ignorance is not so vast as our failure to use what we know.” This Hubbert assertion of decades ago speaks volumes about today's tasks of dealing with pressing energy realities. In fact, much of what we have seen in terms of the industry's more recent efforts to evaluate and develop new resources over the past decade amounts to a strong embrace of this observation by Hubbert. We are getting better at using what we now know we know!

Because of the emerging potential of unconventional resources, there are valid reasons to be optimistic. With what has evolved, the US has the ability over the next several decades to cope much more effectively with the challenges posed by international disruptions of oil supply and an eventual peaking of conventional oil production. With possible lags, the same may become true for many other oil-producing countries.

“We are getting better at using what we now know we know!”