Thank you for inviting us to come here. This presentation is somewhat complicated but we have to cover the ground. As to my background, I did geology at Oxford years ago and I did my Ph.D in Connemara. That started a kind of love affair with Ireland. I had a long link with Ireland. Then I joined the oil business in 1958 as an exploration geologist in South America, in Borneo, New Guinea, all over the place. I eventually rose to be executive vice-president of an oil company in Norway. I have seen the full spectrum of this business. I was much involved in the ‘oil boom' that never really took off in Ireland in the 1970s. I was much involved with that chapter of exploration here. That is to give a picture of what geology used to be in the distant past, when we used to ride a mule in the Colombian Andes, with technology no more advanced than a hammer.
I would like to talk about the geological background. I stress that you have to find oil before you can produce it and finding it is absolutely geological business. This is the heart of the whole issue. I feel obliged to stress the geological side of this which is often overlooked.
The second point is depletion. Depletion in itself is an obvious and simple concept. We are born, we pass middle age, we die. If you drink a glass, it starts full and it ends empty. If you drink it quickly, you empty it quickly. There is nothing peculiar, exceptional or extreme about the concept of depletion, so why can we not apply the same general understanding to oil? Why is this oil question so obscured and so misled with denial, confusion, double-talk and everything else? There is no space science about this, it is simply common sense. If we delve into this, we will agree that this is some kind of devastating realisation. The world that we know is changing.
Finally, I will say something about what this might mean for Ireland. I do not know what the oil price was yesterday, but it reached $53 in New York a few weeks ago. The members can see from the graph I have that it has shot through the ceiling. This is some of kind of event, but the oil price may collapse again if there is recession and demand falls. Something exceptional is happening during these days.
I want to give the committee a brief outline of petroleum geology just to set the scene and to emphasise that this is a geological issue. Let us consider how the stuff was formed in the first place. When I was on the mule in Colombia years ago, we did not understand all of this. A geo-chemical revolution has since happened, so we really understand the conditions under which this stuff was formed. The great bulk of the world's oil was formed in just two short moments of extreme global warming, 90 and 150 million years ago. During these times, the warm sunlit waters of algae proliferated. The organic remains of this algae fell to the stagnant rifts that were forming as the continents moved apart. The graphs give an idea of the unique combination of circumstances that had to come into play. Then the rains came. Sediment was washed in from the surrounding lands and the mountains. It filled up the rifts and it buried this organic stuff to a certain temperature, whereupon it was cooked enough to turn into oil.
We have now explored the world for 150 years and we now know where the areas of prolific oil generation occurred. The map displayed shows the North Sea with a green area. This was one of those unique prolific rifts as the Atlantic began to open. There were also other, less satisfactory areas, which are represented by different colours. The blue area is off the south coast of Ireland. The message is that there are a few super-prolific places under very exceptional conditions and they are all known. There may be a few little minor things that could still come in from here and there, but they are not significant in a world context. Poor Ireland just did not sit in the right place during the late Jurassic age. That is nobody's fault, but that is how it was.
Once the oil is formed there are three different possibilities. First, it can just rise up and dissipate as it is formed under enormous pressure. Second, it can rise up and encounter a porous formation such as a compacted beach sand or sandstone. If this flows to the surface, it just escapes. The great tar deposits of Canada and Venezuela are such examples. Finally and much more rarely, if this carrier bed is folded, the oil collects at the top of the fold as oil floats on water.
The current graph shows a picture of an off-shore field with the land, the sea and two wells. The left-hand well has penetrated the thickest part of the reservoir and I depict it in four different arrows. It is easy to understand that, as the water rises as oil is taken out, the locations of these arrows turn to water one by one. This explains why the production declines. It is not just a case of emptying a glass directly; it declines gradually. This decline pattern is imposed by nature.
From that geological background, we can say that oil was formed in the geological past. That means that there is a fixed amount of oil in the planet and one cannot grow it like potatoes. It is there and there is only so much of it. Are we running out? We started to run out when we produced the first barrel, but I suggest that running out is not the issue as it will not happen until far into the future. The important point is when we face the inflection between rising production, as we have known for the last 150 years, and the onset of decline. This is the fundamental discontinuity between an epoch of growth and an epoch of decline. It will eventually run out, but that is not what matters. People will always state that we are running out of oil, but that is not really the issue. What matters is the inflection from rising production to declining production.
Why do we need to know about this? Oil and gas now dominate our lives as 40% of our trade in energy is oil. More than 90% of transport fuel is oil based. Trade depends on transport and much electricity comes from gas. Oil is critical for agriculture. It fuels the tractor, it provides the synthetic nutrients and pesticides without which these modern crops barely function. Some countries need pumps to pump irrigation water, although Ireland is happily not one of these. Over this 150 year period, the production of food has risen greatly, partly thanks to oil, which has allowed the world population to grow enormously. We can agree that this is a very important subject. This is not anything trivial or casual as the whole future of mankind is linked to this issue.
If it is that important, then why were we not told about it? There is no particular technical problem in determining the size of an oil field. There is a certain range of uncertainty, but engineers are capable and can do it. We have to enter the political side of how people report what they found. If one is trying to borrow money from the bank manager, one exaggerates one's assets. If one goes to the tax man, one tries to understate them. There is a certain political or psychological element in reporting. The oil companies reported financial reserves and the stock exchange rules seriously frowned on anyone exaggerating. One went to jail for fraud for saying one had more than one actually had. However, there was no problem about under-reporting what was found. This meant that the oil companies reported the minimum they needed to deliver a satisfactory financial result. That meant that the reserves were progressively revised upwards over time, which gave a very comforting and useful commercial message of steady growth. This suited their image, suited the stock market and suited everyone, but it was intensely misleading because it really reflected under-reporting at the start. Such days are over and we are well aware of the Shell problem, where the company had to downgrade its reserves. That told us that Shell had nothing left in its hip pocket. On the other side, the OPEC countries started to exaggerate what they had because they were competing between each other for a quota which was based on what they reported. The public numbers are therefore extremely unreliable. If the numbers were better and were reliable, then what we are talking about would be entirely self-evident.
I would like to illustrate this OPEC question, which is quite amazing. The next graph is a data set which shows the reserves as reported by the main OPEC countries over the last 20 years. In 1980, Kuwait announced that it had 65 billion barrels of reserves, which dropped to 64 billion barrels by 1984. Suddenly in 1985, Kuwait added 50% overnight. Nothing had been found or had changed in the reservoir or in the oil fields — the change was simply in the reporting of the reserves. Their action prompted Venezuela two years later to double its reserves overnight, which in turn prompted other producers — Abu Dhabi, Dubai, Iran and Iraq — to announce enormous overnight increases. They were followed finally by Saudi Arabia, the biggest producer of all. It is interesting to consider the neutral zone which is owned jointly by Saudi Arabia and Kuwait. The zone has two owners which had no reason to exaggerate as no political game was involved. Therefore, its reserves did not increase.
To consider the figures, is it remotely possible that Abu Dhabi had 92.2 billion barrels of reserves for the last 20 years despite substantial production? Yet, this is the public database that appears in many places without comment or qualification, despite the fact that anybody considering it will know it is unreliable. While I am not 100% sure, I am reaching the conclusion that instead of reporting the remaining reserves, Kuwait reported the total it had found, ignoring production, which would explain why the figures have barely changed since. In addition, it made sense from the perspective of OPEC negotiations to have a relatively fixed number so that its members were not forever re-negotiating.
I hope this gives an idea that the figures are grossly unreliable in regard to the world's most important oil producing area. If we are to adjust the figures in some reasonable way, we must take away the significant amount of some 300 billion barrels that is mixed up in this reporting phenomenon.
The slide shows a major surge in the late 1980s in the reporting behaviour in regard to the Middle East. If this is the only information which one has available, which is the case for many, one could be forgiven for seeing an ever-upward progression and it would be reasonable to extrapolate that more and more oil is being found and that there are no problems on the horizon. However, if one were to take the correct figures and include the revisions to the original discovery, which one must do, one would get a very different picture showing the decline of discovery over the years.
One must find oil before producing it. A further slide indicates the discovery of fields in the US-48. The peak of discovery in the US-48 was in 1930 and was followed 40 years later by the corresponding peak of production. Production must mirror discovery after a certain time-lag. Progress was slow in regard to the old US-48 and it took 40 years to move from one peak to the next. A further example is that of Egypt. Again, there is a classic discovery pattern that more or less follows a bell shaped curve on the graph, with the big fields coming in first. This is now reflected in production in Egypt, which is set to decline steeply. There were two cycles in the case of Indonesia, one offshore and one on land, and these are faithfully reflected in the production pattern. Russia shows a very normal discovery pattern, even under the Soviet regime, which was able to approach exploration in a scientific way, enabling it to find most of the big fields. The slide shows an anomalous fall for Russian production due to the problems associated with the end of the Soviet regime.
A final example is the case of the United Kingdom. Again, the discovery pattern is completely normal. Peak discovery comes in the early 1970s when all the giant North Sea fields came in, and a decline follows. There is an anomalous little saddle in the UK graph which was due to an accident in the offshore field that caused the British to shut down operations briefly and change the regime. However, UK production has now moved past its peak and is declining.
A further slide sums up the position. The information it contains comes from no less a source than ExxonMobil and is an instance of a major oil company at last telling, more or less, the true position and providing the correct figures and dates. It can be seen that discovery has been falling relentlessly since 1964 despite a world-wide search aimed always at the biggest and best prospects — no one is looking for the smallest and worst prospects — and despite the search having the benefits of enormous advances in technology and knowledge. Moreover, discovery has been falling despite a favourable economic regime whereby most of the cost of exploration is written off against tax. The oil companies are spending taxpayers' money to look for oil and if they still cannot find it, we must conclude it does not exist.
There is no good reason to expect this downward trend of 40 years' duration to change direction. The graph, therefore, extrapolates what is left to find. The data for production is superimposed on the graph and indicates that in 1981 the world began using more oil than it found and that the gap has been widening ever since. A serious crisis is developing for which the evidence is clear and which is now confirmed by a major oil company.
We can think of this in terms of three tanks: a yet to find tank of approximately 150 billion barrels, a tank of discovered oil of some 1,700 billion barrels, half of which has been produced, and a tank containing new discoveries. While we cannot ignore the possibility of a surprise, we know enough to say that the surprise will not be very big. New discoveries coming in amount to just under 4 billion barrels per year while oil is being produced at 22 billion barrels per year. In other words, six barrels are going out for every one coming in. This tells us we are draining the tanks, which is no great surprise. North America's reserves have been heavily depleted and the graph indicates the current position. Most oil remains in the Middle East, which is not a surprise.
In any attempt to analyse this information, it must be understood that the figures are not set in stone and interpretation and detective work are required to evaluate the different data. We have a picture of the regular oil, that is, the easy, cheap oil that has delivered most to date and which will dominate all supply finds of the future. We are, more or less, at the peak of oil production and have used one half of the oil we will ever produce. While I could further discuss the uncertainties in regard to the peak, it will come next year, as calculated from the figures available to us.
In addition, heavy oils are coming in slowly from Canada, where they are obtained by what is almost a mining process, and some deep water oil is coming in. That drilling for oil is taking place in 1,000 metres of water tells us something. What company would do this if there were easier options? However, this will produce only a small surge. There is plenty of deep water throughout the world but few places where deep water combines with the exceptional geology that makes oil production work.
We can draw from all this the devastating conclusion that oil supply will soon, as in next year, begin to be in terminal decline. Gas depletion will follow a little later. Gas is more difficult to model and while it is less depleted than oil, it has a different depletion profile, a matter to which I will refer in regard to Ireland. It is more susceptible to the problems associated with infrastructure, including the construction of pipelines and so forth.
This is not a trivial matter but will have a colossal impact and is at the heart of the modern world. The economy will be affected and this will herald some type of stock market crash because the growth driven by cheap energy will no longer take place. Society will be indirectly affected because the politics of the modern world is driven by meeting the dictates of an economic system that is living in the past. We are entering new territory and because of this it is hard to know how to react. However, it can be said that it is a historical change from the world we knew to one we do not know, and we arrive at this position absolutely unprepared.
I compliment the committee on listening to my contribution because it is a step forward that some are paying attention to this matter. However, this is not universal, although things are changing. We have reached the end of the first half of the age of oil. It lasted 150 years and it stimulated industry, transport, trade, agriculture and eventually people. It stimulated the growth of an enormous amount of financial capital. We now enter the beginning of the second half, the decline of oil and all that depends upon it, including this financial capital that was built out of the whole system which evolved on the strength of this cheap energy.
I show a rather devastating slide. At the time of Christ there were 300 million living on this planet, which had risen to about 1 billion by the time they drilled the first oil well. Then the population of the world went up six times over the past 150 years, exactly in parallel with oil. It poses the question of how many people the planet can support without oil. It is not a good question and a terrible one to answer.
I think the world is now waking up in a certain way. All this is evident for a long time to anybody in this business but there has been a hesitancy to come out and say it. There have been denial and confusion. We really face what I would describe as the malign influence of economists who say there can be no shortage in an open market. The basic faith of economists is that everything is solved by liberalisation. That is the mindset of these people. It was an admirable system before these physical constraints were found.
Now at last we have had this oil price shock which is raising awareness of this matter. Oil is now $50 a barrel — it was $20 a year or two ago. I detect a fundamental change in the establishment position. Just a month or two ago I was at a conference in the World Energy Council, a very prestigious and authoritative organisation. It changed direction 180° and admitted to peak oil production and spoke of its dire consequences. Here is a shift by a prime establishment body. Most governments rely on the International Energy Agency in Paris.
