Oil News Briefs

From “The Global Energy Outlook for the 21st Century,” a lecture delivered on May 21, 2003 by Peter R. Odell, Professor Emeritus at the Erasmus University in Rotterdam, where he was the Director of the Center for International Energy Studies:

Finally, a word of caution on the essential fragility of a study on the very long-term future for the world’s energy supply which accepts without question the validity of the original 18th century hypothesis that all oil and gas resources have been generated from biological matter in the chemical and thermodynamic environments of the earth’s crust. There is an alternative theory – already 50 years old – which suggests an inorganic origin for additional oil and gas. This alternative view is widely accepted in the countries of the former Soviet Union where, it is claimed, “large volumes of hydrocarbons are being produced from the pre-Cambrian crystalline basement”. Recent applications of the inorganic theory have, however, also led to claims for the possibility of the Middle East fields being able to produce oil “forever” and to the concept of repleting oil and gas fields in the gulf of Mexico. More generally, it is argued, “all giant fields are most logically explained by inorganic theory because simple calculations of potential hydrocarbon contents in sediments shows that organic materials are too few to supply the volumes of petroleum involved.”

The significance of the alternative theory of the origin of additional oil and gas potential is self evident for the issue of the longevity of hydrocarbons’ production potential and production costs in the 21st century. Instead of having to consider a stock reserve already accumulated in a finite number of so-called oil and gas plays, the possibility emerges of evaluating hydrocarbons as essentially renewable resources in the context of whatever demand developments may emerge. If fields do replete because the oil and gas extracted from them is abyssal and abiotic (based on chemical reactions under specific thermodynamic conditions deep in the earth’s mantle), then extraction costs should not rise as production from such fields continues for an indefinite period. Neither do estimates of reserves, reserves-to-production ratios and annual rates of discovery and additions to reserves have any of the importance correctly attributed to them in evaluating the future supply prospects under the organic theory of oil and gas’ derivation. In essence, the “ball park” in which consideration of the issues relating to the future of oil and gas has hitherto been made would no longer remain relevant.
[more: http://www.clingendael.nl/ciep/pdf/Odell_2003_05_21_lecture.pdf]

Some of the arguments about resource scarcity resemble those made in the 1970s. They have noted that discoveries are low (as did Wilson (1977) and that estimates of ultimately recoverable resources (URR) are in the range of 2 trillion barrels, approximately twice production to date. But beyond that, Campbell and Leherrere in particular claim that they have developed accurate estimates of URR, and thus, this time the wolf is really here. But careful examination of their work reveals instead a pattern of errors and mistaken assumptions presented as conclusive research results.

The Hubbert Curve

The initial theory behind what is now known as the Hubbert curve was very simplistic. Hubbert was simply trying to estimate approximate resource levels, and for the lower-48 US, he thought a bell-curve would be the most appropriate form. It was only later that the Hubbert curve came to be seen as explanatory in and of itself, that is, geology requires that production should follow such a curve [editor’s note: if, that is, petroleum is organic in origin]. Indeed, for many years, Hubbert himself published no equations for deriving the curve, and it appears that he only used a rough estimation initially. In his 1956 paper, in fact, he noted that production often did not follow a bell curve. In later years, however, he seems to have accepted the curve as explanatory.

[…]

Revival of the Hubbert Method

The recent authors, notably Campbell and Leherrere have apparently rediscovered the Hubbert curve, but without understanding it, at least initially. Campbell and Leherrere initially argued that production should follow a bell curve, at least in an unconstrained province. But this is demonstrably not the case in practice: most nations’ production does not follow a Hubbert curve. In fact, Campbell (2003) shows production curves (historical and forecast) for 51 non-OPEC countries, and only 8 of them could be said to resemble a Hubbert curve even approximately.

The authors initially responded to this weakness by arguing the Hubbert curve could have multiple peaks, which of course means it would not follow a bell curve at all, and destroys the explanatory value of the bell curve. As the alleged value of the Hubbert curve lies partly in demonstrating the production decline post-peak, not knowing whether any given peak is the final one renders this useless, nor would the peak imply that midpoint production had been reached (indicating URR).

Recognizing this, the theory has been modified again, to “The important message from Hubbert’s work, which is often forgotten by economists, is that oil has to be found before it can be produced.” (Laherrere 2001b, p.4) In other words, the Hubbert curve, originally held as scientific and inviolable, is of no particular value. Yet the authors have not only mistakenly believed in its properties, they have not been forthcoming about their own errors.

[…]

Opaque Work, Unproven Assertions

The lack of rigor in many of the Hubbert modelers’ arguments makes them hard to refute. The huge amount of writing, along with undocumented quotes and vague remarks, necessitates exhaustive review and response …

Perhaps because they are not academics, the primary authors have a tendency to publish results but not research. In fact, by relying heavily on a proprietary database, Campbell and Leherrere have generated a strong shield against criticism of their work, making it nearly impossible to reproduce or check. Similarly, there is little or no research published, merely the assertion that the results are good.

[much more at: http://www.energyseer.com/NewPessimism.pdf]

[…]

But in the United States, consumer groups say the blame for higher pump prices lies not so much with OPEC as with the huge oil companies. Public Citizen, a Washington, D.C.-based watchdog organization, is preparing to release a report later this week charging that the oil industry deliberately consolidated in the 1990s so that it could withhold supplies and reduce storage capacity.

[…]

The Consumer Federation of America said in a recent report that in the past 15 years, more than 70 refineries in the United States were closed. Additionally, its report said, the nation’s storage facilities were reduced by nearly 15 percent. Mark Cooper, the organization’s research director, said an updated report is expected soon.

The largest five companies operating in the United States (ExxonMobil, Chevron Texaco, ConocoPhillips, BP and Royal Dutch Shell) now control:

• 14.2% of global oil production (nearly as much as the entire Middle East members of the OPEC cartel).
• 48% of domestic oil production (which is significant given the fact that the U.S. is the 3rd largest oil producer in the world).
• 50.3% of domestic refinery capacity.
• 61.8% of the retail gas market.
• These same five companies also control 21.3% of domestic natural gas production.

It is therefore little wonder why these top companies enjoyed after-tax profits of $60 billion in 2003 alone.

These figures are in stark contrast to just a decade ago, when the top five oil companies controlled only:

• 7.7% of global crude oil production.
• 33.7% of domestic crude production
• 33.4% of domestic refinery capacity.
• 27% of the retail market.
• In addition, in 1993, the top five U.S. companies controlled only 12.7% of domestic natural gas production.

The major difference between 1993 and 2003 is that the largest oil companies have merged with one another, creating just a handful of oil monopolies that control significant chunks of the American oil and gas markets. Armed with significant market share, companies can more easily pursue uncompetitive activities that result in price-gouging …

Gasoline prices are rising because of uncompetitive actions by this handful of new mega-companies, not because of environmental regulations …

The U.S. Federal Trade Commission (FTC) concluded in March 2001 that oil companies had intentionally withheld supplies of gasoline from the market as a tactic to drive up prices — all as a “profit-maximizing strategy.” These actions, while costing consumers billions of dollars in overcharges, have not been investigated by the U.S. government.

… Since 2001, President Bush has been removing more than 100,000 barrels of oil a day from the market to stock the SPR [Strategic Petroleum Reserve], filling it by more than 100 million barrels since he’s been in office to over 640 million barrels — well more than 90% capacity. President Bush’s actions, while providing more than enough protection against external supply shocks, severely strains domestic supplies for the market.

[…]

Companies have exploited [their] strong market position to intentionally restrict refining capacity by driving smaller, independent refiners out of business. A congressional investigation uncovered internal memos written by the major oil companies operating in the U.S. discussing their successful strategies to maximize profits by forcing independent refiners out of business, resulting in tighter refinery capacity. From 1995-2002, 97% of the more than 920,000 barrels of oil per day capacity that have been shut down were owned and operated by smaller, independent refiners.

[…]

If these allegations of price gouging sound too conspiratorial for some to accept, examples in related industries demonstrate that price-fixing, collusion and price-gouging are regular occurrences in today’s economy, as large corporations routinely abuse their market power to engage in anti-competitive behavior.

[…]

Contracts representing hundreds of millions of barrels of oil are traded every day on the London, New York and other energy trading exchanges. An increased share of this trading, however, has been moved off regulated exchanges such as the New York Mercantile Exchange (NYMEX) and into unregulated Over-the-Counter (OTC) exchanges. Traders operating on exchanges like NYMEX are required to disclose significant detail of their trades to federal regulators. But traders in OTC exchanges are not required to disclose such information allowing companies like Enron, ExxonMobil, and Goldman Sachs to escape federal oversight and more easily engage in manipulation strategies.

The growth of these OTC exchanges exploded in 2000 when Congress passed the Commodity Futures Modernization Act. The Act, among other things, punched a large loophole in government of energy trading by greatly expanding the ability of traders to operate in unregulated over-the-counter exchanges. These OTC markets do not feature the tighter regulation that typically applies to traders engaged in regulated exchanges, such as the New York Mercantile Exchange (NYMEX). Since this deregulation law took effect, the industry – led by Enron – has been plagued by dozens of high-profile scandals attributed to the lack of adequate regulatory oversight over traders’ operations. Free from government transparency regulations, energy traders have demonstrated an ability to manipulate prices more easily.

[…]

• Over ten percent of the nation’s refineries and branded gasoline stations were closed. In the past 15 years, more than 70 refineries were closed.
• The nation’s petroleum storage facilities were reduced by nearly fifteen percent.
• The industry systematically lowered stocks on hand to the point where only a one or two-day supply above minimum levels was available to keep the country’s gasoline distribution running (compared to a supply of a bout a week in the 1980s)

This consolidation and concentration has been permitted by mergers that allowed the industry to manipulate prices. By standards of the Reagan Administration’s Justice Department, four-fifths of the national refinery and gasoline markets now are considered to be dangerously concentrated.

“A concentrated, vertically integrated industry has responded slowly to price shocks and has even acted to keep supplies off the market,” noted Cooper. “While the industry complains that clean air standards requiring different additives in different markets restrict region-to-region flows of gasoline, these requirements actually give individual suppliers greater market power, aggravating the concentration problem,” added Cooper.

This response is for Daniel E. Reynolds, 29 July 1996 on the subject of “Oil – A renewable and abiotic Fuel?”

Dan, your use of the word “abiotic” is good. As a non-fossil fuel, petroleum has no living antecedent. It contains chemical elements found in living matter; but it is not “formerly living matter.” There has not been enough true “formerly living matter” through all of creation to account for the volume of petroleum that has been consumed to date.

My background in this subject goes back to 1943. I was the pilot who flew a U.S. Geological Survey Team from Casablanca to Dhahran, Saudi Arabia. We met the Cal. Standard Oil team holding down that lease. Then we went back to Cairo to meet President Roosevelt during the Nov. 1943 “Cairo Conference” with Churchill and Chiang Kai Shek. FDR ordered the immediate construction of an oil refinery there for WW II use. This led to ARAMCO.

During the “Energy Crisis” of the 1970’s I was detailed to represent the U.S. Railroad industry as a member of the “Federal Staff Energy Seminar” program started by the Center for Strategic and International Studies, sponsored by Georgetown University. That began in Jan 1974 and continued for four years. It was designed to discuss “the working of the United States national energy system, and new horizons of energy research.” Among the regular attendees were such men as Henry Kissinger and James Schlesinger…most valuable meetings.

During one meeting we took a “Buffet Break” and I was seated with Arthur Kantrowitz of the AVCO Company…”Kantrowitz Labs” near Boston. At the table with us were four young geologists busily talking about Petroleum. At one point one of them made reference to “Petroleum as organic matter, and a fossil fuel.” Right out of the Rockefeller bible.

Kantrowitz turned to the geologist beside him and asked, “Do you really believe that petroleum is a fossil fuel?” The man said, “Certainly” and all four of them joined in. Kantrowitz listened quietly and then said, “The deepest fossil ever found has been at about 16,000 feet below sea level; yet we are getting oil from wells drilled to 30,000 and more. How could fossil fuel get down there? If it was once living matter, it had to be on the surface. If it did turn into petroleum, at or near the surface, how could it ever get to such depths? What is heavier Oil or Water?” Water: so it would go down, not oil. Oil would be on top, if it were “organic” and “lighter.”

“Oil is neither.”

They all agreed water was heavier, and therefore if there was some crack or other open area for this “Organic matter” to go deep into the magma of Earth, water would have to go first and oil would be left nearer the surface. This is reasonable. Even if we do agree that “magma” is a “crude mixture of minerals or organic matters, in a thin pasty state” this does not make it petroleum, and if it were petroleum it would have stayed near the surface as heavier items, i.e. water seeped below.

My D. Van Nostrand “Scientific Encyclopedia” says “Magma is the term for molten material. A natural, complex, liquid, high temperature, silicate solution ancestral to all igneous rocks, both intrusive and effusive. The origin of Magma is not known.” My “Oxford English Dictionary” does not even have the word “Magma.”

Some years ago I wrote two or three pages that appeared in the McGraw Hill Yearbook of Science and Technology, i.e. “Railroad Engineering.” Even that source is a bit uncertain about the “origin of petroleum” to wit:

“Less than 1% of the organic matter that originates in or is transported to the marine environment is eventually incorporated into ocean sediment,” and

“Most petroleum is formed during catagenesis (undefined anywhere). If sufficient organic matter is present oceanic sediments that undergo this process are potential petroleum sources. Deeply buried marine organic matter yields mainly oil, whereas land plant material yields mainly gas.” (Their idea of “deeply buried” is the “out.”)

All this leaves us no where. I still go with Kantrowitz. Since oil is lighter than water, everywhere on Earth, there is no way that petroleum could be an organic, fossil fuel that is created on or near the surface, and penetrate Earth ahead of water. Oil must originate far below and gradually work its way up into well-depth areas accessable to surface drilling. It comes from far below. Therefore, petroleum is not a “Fossil” fuel with a surface or near surface origin.

It was made to be thought a “Fossil” fuel by the Nineteenth [sic] oil producers to create the concept that it was of limited supply and therefore extremely valuable. This fits with the “Depletion” allowance philosophical scam.

During one of our C.S.I.S. “International Nights” (1978) the Common Market Energy boss, M. Montibrial of France, told us that while petroleum was being marketed then for $20.00 per barrel or more, it cost no more than 25 cents per barrel at the well-head. There is our petroleum problem! We were paying more than $1.50-$1.60 per gallon, one 42nd of a barrel, at that time. Interested folks need to learn more about the Chartered Institute of Transport, and not waste their time with OPEC, the “Cover” story.

Those who pumped the Pennsylvania wells “dry” during the late eighteen hundreds saved what they had for those better days.